**GO
        Draft March 29, 2007**
 
 **UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 (
        X )
        ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        fiscal year ended December 31, 2006
 
 (
        )
        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF
        1934
 
 Commission
        File Number 000-51364
 
 
 **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 (Name
        of
        small business issuer in its charter)
 
 
 **Utah**
              **32-0028823**(State
                  or other jurisdiction
              (IRS
                  Employer Identification No.)of
                  incorporation or organization)
 
 
 The
        Farmhouse
 558
        Lime
        Rock Road
 Lime
        Rock, Connecticut 06039
 (Address
        of Principal Executive Offices) (Zip Code)
 
 Issuer's
        Telephone Number:  (860)
        435-7000
 
 Securities
        registered under Section 12 (b) of the Act: NONE
 
 
 Securities
        to be registered under Section 12 (g) of the Act:
 
 COMMON
        STOCK, PAR VALUE $.001 PER SHARE
 (Title
        of
        Class)
 
 Check
        whether the issuer (1) filed all reports required to be filed by Sections
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes |X| No |_|
 
 Check
        if
        disclosure of delinquent filers in response to Item 405 of Regulation S-B
        is not
        contained in this form, and no disclosure will be contained, to the best
        of
        registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any amendment
        to
        this Form 10-KSB. [__]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes |_| No |X|
 
 State
        Issuer’s revenue for its most recent fiscal year: $10,870,718
  
  As
        of
        March 26, 2007 the aggregate market value of the common stock held by
        non-affiliates was approximately $ 6,792,498 based upon the last reported
        closing price on March 6, 2007 of $4.99. As of March 26, 2007, there were
        14,920,346 shares of common stock outstanding.
 
 Documents
        incorporated by reference: None
 
 Transitional
        Small Business Disclosure Format: Yes |_| No |X|
  TABLE
          OF
          CONTENTS
 PART
                    IPAGEItem
                    1.
                Description
                    of Business
                2Item
                    2.
                Description
                    of Property
                23Item
                    3.
                Legal
                    Proceedings
                24Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                24PART
                    IIItem
                    5.
                Market
                    for Common Equity and Related Stockholder Matters
                24Item
                    6.
                Managements
                    Discussion and Analysis or Plan of Operation
                26Item
                    7.
                Financial
                    Statements
                34Item
                    8.
                Changes
                    in and Disagreements With Accountants on Accounting and Financial
                    Disclosure
                35Item
                    8A
                Controls
                    and Procedures
                35Item
                    8B
                Other
                    Information
                35PART
                    IIIItem
                    9.
                Directors,
                    Executive Officers, Promoters and Control persons; Compliance
                    with Section
                    16(a) of the Exchange Act.
                35Item
                    10.
                Executive
                    Compensation
                38Item
                    11.
                Security
                    ownership of Certain Beneficial Owners and Management
                38Item
                    12.
                Certain
                    Relationships and Related Transactions
                40PART
                    IVItem
                    13.
                Exhibits
                    and Reports on Form 8-K
                43Item
                    14.
                Principal
                    Accountant Fees and Services
                44Signatures
  1
  **PART
        I**
 
 ***Item
        1.***  ***Description
        of Business***
 
 **Information
        regarding forward-looking statements and other information in this annual
        report**
 
 Our
        disclosure and analysis in this annual report contains some forward-looking
        statements. Certain of the matters discussed concerning our operations, cash
        flows, financial position, economic performance and financial condition,
        including, in particular, future sales, demand, the market for natural gas
        in
        the People's Republic of China, competition, exchange rate fluctuations and
        the
        effect of economic conditions include forward-looking statements within the
        meaning of section 27A of the Securities Act and Section 21E of the Exchange
        Act.
 
 Statements
        that are predictive in nature, that depend upon or refer to future events
        or
        conditions or that include words such as "expects," "anticipates," "intends,"
        "plans," "believes," "estimates" and similar expressions are forward-looking
        statements. Although we believe that these statements are based upon reasonable
        assumptions, including projections of orders, sales, operating margins,
        earnings, cash flow, research and development costs, working capital, capital
        expenditures and other projections, they are subject to several risks and
        uncertainties, and therefore, we can give no assurance that these statements
        will be achieved.
 
 Investors
        are cautioned that our forward-looking statements are not guarantees of future
        performance and the actual results or developments may differ materially
        from
        the expectations expressed in the forward-looking statements.
 
 As
        for
        the forward-looking statements that relate to future financial results and
        other
        projections, actual results will be different due to the inherent uncertainty
        of
        estimates, forecasts and projections may be better or worse than projected.
        Given these uncertainties, you should not place any reliance on these
        forward-looking statements. These forward-looking statements also represent
        our
        estimates and assumptions only as of the date that they were made. We expressly
        disclaim a duty to provide updates to these forward-looking statements, and
        the
        estimates and assumptions associated with them, after the date of this filing
        to
        reflect events or changes in circumstances or changes in expectations or
        the
        occurrence of anticipated events.
 
 We
        undertake no obligation to publicly update any forward-looking statement,
        whether as a result of new information, future events or otherwise. You are
        advised, however, to consult any additional disclosures we make in our reports
        on Form 10-KSB, Form 10-QSB, Form 8-K, or their successors. We also note
        that we
        have provided a cautionary discussion of risks and uncertainties under the
        caption "Risk Factors" in our registration statement filed with the SEC on
        October 27, 2006. These are factors that we think could cause our actual
        results
        to differ materially from expected results. Other factors besides those listed
        here could also adversely affect us.
 
 Information
        regarding market and industry statistics contained in this annual report
        is
        included based on information available to us which we believe is accurate.
        We
        have not reviewed or included data from all sources, and cannot assure
        stockholders of the accuracy or completeness of the data included in this
        annual
        report. Forecasts and other forward-looking information obtained from these
        sources are subject to the same qualifications and the additional uncertainties
        accompanying any estimates of future market size, revenue and market acceptance
        of products and services. This discussion is provided as permitted by the
        Private Securities Litigation Reform Act of 1995.
 
 Unless
        otherwise noted, all currency figures in this filing are in U.S. dollars.
        References to the “PRC” or “China” are to the People’s Republic of China.
        References to "yuan" or "RMB" are to the Chinese yuan (also known as the
        renminbi). According to the currency exchange website www.xe.com, on March
        26,
        2007, $1.00 = 7.74730 yuan.
 
 “Sino
        Gas,” “we” and “the Company” refer to Sino Gas International Holdings, Inc. and
        our subsidiaries or, as context requires, Sino Gas International Holdings,
        Inc.
        alone. “Exchange Act” refers to the Securities Exchange Act of 1934, as
        amended.
 
 Unless
        otherwise indicated, “2006” and “2005” refer to the fiscal years ended December
        31, 2006 and December 31, 2005, respectively.
 
 **Overview
        of Our Business**
  2
 
 We
        are
        engaged in the development of natural gas distribution systems in small-
        and
        medium-sized cities in China, as well as the distribution of natural gas
        to
        residential, commercial and industrial customers in China through our indirectly
        owned subsidiaries in the PRC, Beijing Zhong Ran Wei Ye Gas Co., Ltd. (“Beijing
        Gas”) and its subsidiaries.
 
 We
        own
        and operate 23 natural gas distribution systems serving approximately 63,000
        residential and five commercial and industrial customers. Our facilities
        include
        approximately 700 kilometers (“km”) of pipeline and delivery networks with a
        designed daily capacity of approximately 70,000 cubic meters of natural gas.
        Currently, we are constructing an additional four natural gas distribution
        systems. We own and operate natural gas distribution systems primarily in
        Hebei,
        Jiangsu, Shandong and Anhui Provinces. The following table presents, for
        the
        periods indicated, selected operating data:
 
 At
                  and for the year ended December 31,2006
              
              2005Total
                  gas distributed and supplied (yuan)
              
              
              29,132,897.35
              
              
              22,167,785.79Distribution
                  network (km)
              
              
              390
              
              
              187.8Number
                  of industrial customers
              
              
              5
              
              
              4Number
                  of residential customers
              
              
              48,199
              
              
              23,700
  We
        buy
        natural gas for distribution in three forms: (i) piped natural gas—we use piped
        natural gas (“PNG”) if the gas source, or long distance pipeline, is located
        within a reasonably short distance of our system; (ii) compressed natural
        gas
        (“CNG”); and (iii) liquefied natural gas (“LNG”). Both CNG and LNG are natural
        gas that has been compressed into canisters so as to enable transportation,
        usually by truck, to the point of distribution or consumption. Typically
        CNG is
        compressed under 200 times pressure and transported at normal temperature,
        while
        LNG is compressed at 600 times pressure and transported at sub zero degree
        temperature. CNG is generally transported within a distance of 300 km. There
        is
        no distance restriction in transporting LNG. As LNG is compressed at much
        higher
        pressure and transported at much lower temperature than CNG, the cost of
        compression and processing of LNG is higher than that of CNG.
  Generally,
        if a customer is located within 300 km of our natural gas supplier, we transport
        CNG to the customer. We transport LNG to a customer if the customer is located
        more than 300 km away from a supplier. Approximately 99% of the natural gas
        we
        purchase is CNG and approximately 1% is LNG.
 
 We
        generate revenues in two ways: (i) connection fees for the sale of
        interconnections to our natural gas distribution system and (ii) the sale
        of
        natural gas. In 2004, we also generated sales from the sale of natural gas
        appliances and equipment, gas meters, and repair, maintenance and related
        services. In 2005, we ceased supplying gas appliances, equipment and gas
        meters
        as sales of such items were not very profitable and our customers can find
        more
        varieties of these items readily available on the open market. We have two
        types
        of customers: (i) residential and (ii) commercial or industrial. The following
        table presents, for the periods indicated, the revenues generated from each
        of
        our major categories of operations:
 
 At
                  and for the year ended December 31,2006
                (in
                  US$ millions)
              
              2005
                (in
                  US$ millions)Connection
                  fees (as % of total Sales)
              
              
              7.22(66
              %)
              
              8.2
                  (75.2
              %)Gas
                  sales
              
              
              3.65(34
              %)
              
              2.7
                  (24.8
              %)Other
                  sales
              
              
              —
              
              
              —
 
 Our
        cost
        of sales consists of cost of gas sales and cost of connection. Cost of gas
        sales
        consists of cost of natural gas purchased from the suppliers, transportation
        cost, depreciation of plant and equipment, and amortization of the capitalized
        construction costs as our expenditures in constructing our pipeline
        infrastructure are generally capitalized as fixed assets and amortized over
        a
        period of time. Cost of connection includes certain construction costs that
        are
        expensed.
  3
  The
        following table presents Beijing Gas’s costs of sales for the periods
        indicated:
 
 At
                  and for the year ended December 31,2006
                (in
                  US$ millions)
              
              2005
                (in
                  US$ millions)Gas
                  cost
              
              
              2.84
              
              
              2.53Connection
                  cost
              
              
              1.55
              
              
              1.57
 
 Our
        business is generally affected by two seasonal factors: First, between December
        and March, the weather is too cold in northern China for construction. For
        a
        given gas distribution project, to avoid running into this time period, we
        generally start the process of pipeline installation, which has a duration
        of
        six to eight months, in April so as to complete the process before December.
        As
        a result, most of our revenues from connection fees are recorded in the fourth
        quarter. Second, winter is our peak season for gas sales, as our customers
        tend
        to consume more natural gas for heating purposes.
  **Our
        Strategy**
 
 Our
        strategy involves a four-part plan: (i) serve smaller cities each with a
        population of no more than one million, where there is little competition
        to
        obtain a franchise, and where our franchise grants us exclusivity; (ii) contract
        for long term supplies of natural gas on favorable prices and terms; (iii)
        finance our Company using a well-designed financing plan that will give us
        a
        favorable cost of capital; and (iv) employ the best management.
 
 ***(i)
        Small Cities; Exclusive Franchises.*** We focus
        on small- to medium-sized cities, generally near a larger metropolitan area.
        In
        such places in the PRC, we are in a better position to obtain exclusive natural
        gas distribution system development and supply franchise agreements in
        negotiating with the cities, which urgently need to provide their citizens
        with
        energy, and usually don’t have the leverage of very large cities, which can
        attract multiple bidders for their franchises. Accordingly, we require and
        receive an exclusive franchise entitling us to be the sole natural gas utility
        in such city. Usually, our franchises are for a period of 25-30
        years.
 
 ***(ii)
        Favorable Natural Gas Contracts.*** We
        have
        established and developed stable and long term contracts with China’s major
        natural gas suppliers, including close cooperation with such major state-owned
        entities in the petroleum and natural gas industry as Petro China Company
        Limited and Sinopec Corporation.
 
 ***(iii)
        Financing Plan.*** We
        anticipate using our financing plan as a competitive tool. Our goal is to
        duplicate the type of financing plan and related financial instruments used
        by
        utilities in the United States, including the issuance of subsidiary level,
        non-recourse debt, preferred stock and holding company fixed income issuances.
        Such a financing plan can not only give us a favorable cost of capital, but
        enhance investor returns and keep investor dilution at a minimum.
 
 We
        are in
        a very capital-intensive business. Our income will depend on our ability
        to
        issue the above-mentioned financial instruments. There can be no assurance,
        however, that we will be successful in issuing or selling such instruments
        to
        investors which would have a direct and negative impact on our future
        earnings.
 
 ***(iv)
        Employ the Best Management.*** **** We
        have a
        team of senior executives who are industry experts each with a track record
        of
        success in managing larger Chinese petroleum and/or gas companies. Our founder
        and Chief Executive Officer, Mr. Yu-Chuan Liu, is a natural gas industry
        expert
        with over 20 years experience in senior management positions at Petro China
        and
        China Gas Holdings Limited, a Hong Kong Stock Exchange-listed PRC company.
        Our
        Chief Operating Officer, Mr. Zhou Zhi Cheng, served as the director and General
        Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2006. Prior
        to
        that, Mr. Zhou served as the Associate General Manager and later General
        Manager
        of Beijing Zhong Ran Xiang Ke Petroleum and Oil Technology Co., Ltd. from
        2001
        to 2002. Our Chief Engineer, Mr. Shu-Kui Bian, is one of the draftsmen of
        the
        PRC national standard for urban gas supply, and was previously the chief
        executive officer of the First Oil Extraction Plant of North China Oilfield.
 
 4
 **Organization
        and Structure of the Company**
 
 We
        operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas
        and
        its subsidiaries. A separate subsidiary with nominal operations, Pegasus
        Tel,
        owns and operates payphones. We plan to spin off Pegasus Tel in the form of
        a dividend to our shareholders of record as of August 30,
        2006.
  As
        of
        December 31, 2006, our corporate structure is set forth
        below:
 
 
  (1)
        The
        subsidiaries of Beijing Gas are set forth below:
  **Subsidiary**
              
              **Beijing**
                **Gas’s**
                **Equity**
                **Interest**Yu
                  Tian county Zhong Ran Wei Ye Gas Ltd.
              
              
              90
              %Ning
                  Jing Wei Ye Gas Ltd.
              
              
              95
              %Xing
                  Tang County Wei ye Gas Ltd.
              
              
              95
              %Lin
                  Zhang County Wei Ye Gas Ltd.
              
              
              85
              %Jin
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Wu
                  Qiao County Gas Ltd.
              
              
              95
              %Long
                  Yao County Zhong Ran Wei Ye Gas Ltd.
              
              
              95
              %Shen
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Pei
                  County Wei Ye Gas Ltd.
              
              
              90
              %Si
                  Hong Wei Ye Gas Ltd.
              
              
              95
              %Si
                  Shui Wei Ye Gas Ltd.
              
              
              95
              %Lang
                  Fang Development Zone Wei Ye Dangerous Goods Transportation
                  Ltd.
              
              
              95
              %Beijing
                  Zhong Ran Xiang Ke Gas Technology Ltd.
              
              
              40
              %Zhangjiakou
                  City Xiahuayuan Jinli Gas Ltd. Co.
              
              
              100
              %Yuxian
                  Jinli Gas Ltd. Co.
              
              
              100
              %Beijing
                  Chenguang Gas Ltd., Co.
              
              
              100
              %Changli
                  Gas Co. Ltd.
              
              
              100
              %Hengshui
                  Gas Co. Ltd.
              
              
              100
              %
  5
  ***Organizational
        History***
 
 Sino
        Gas
        International Holdings, Inc. was incorporated under the laws of the State
        of
        Utah on August 19, 1983 as Evica Resources, Inc. On April 5, 1984, we changed
        our name to American Arms, Inc. American Arms, Inc. commenced the manufacture
        and sale of weapons and laser sights. On December 31, 1984, our Articles
        of
        Incorporation were suspended for failure to file an annual report. Our Articles
        of Incorporation were reinstated on December 19, 1985 by the Utah Department
        of
        Commerce, Division of Corporations. On October 1, 1984, our Articles of
        Incorporation were suspended a second time for failure to file an annual
        report.
        Our Certificate of Incorporation was reinstated on November 21, 1986 again
        by
        the State of Utah, Department of Commerce, Division of
        Corporations.
 
 On
        April
        12, 1988, we changed our name to American Industries, Inc. as we were no
        longer
        engaged in the manufacturing and sale of weapons and laser sights. American
        Industries, Inc. was in the business of providing room safes for
        hotels.
 
 On
        February 19, 2002, we formed a subsidiary corporation named Pegasus Tel,
        Inc.
        under the laws of the State of Delaware, in order to enter into the
        telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged
        with
        Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc.
        as
        the surviving entity. On January 14, 2002 we purchased payphone assets
        consisting of 29 payphones and associated equipment from the Margaretville
        Telephone Company for $11,600.00. On May 21, 2002, we changed our name to
        Dolce
        Ventures, Inc.
  On
        September 7, 2006, we consummated a share exchange transaction with the
        shareholders of GAS Investment China Co., Ltd. (“Gas (BVI)”), the parent company
        of Beijing Gas, whereby we exchanged 14,361,646 shares of our series A
        convertible preferred stock, par value $0.001 per share, for all of the issued
        and outstanding stock of Gas (BVI) held by the shareholders of Gas (BVI).
        As a
        result of the share exchange transaction, Gas (BVI) became our wholly-owned
        subsidiary, and Beijing Gas became our indirectly wholly-owned subsidiary.
        In
        addition, as a result of the share exchange transaction, we ceased being
        a shell
        company as such term is defined in Rule 12b-2 under the Exchange Act and
        are now
        engaged in the development of natural gas distribution systems and the
        distribution and supply of natural gas in the PRC.
 
 On
        November 17, 2006, we changed our name to Sino Gas International Holdings,
        Inc.,
        announced our new trading symbol, SGAS, and effected a 304.44-for-1 reverse
        stock split.
 
 ***Change
        in Control of the Company***
 
 On
        September 7, 2006, we effected a change of control in the Company through
        a
        reverse merger transaction, in which the shareholders of Gas (BVI) purchased
        72,569,764 shares or our common stock, representing approximately 72.01%
        of our
        then outstanding voting securities, in exchange for $675,000  Following
        the transaction, our new controlling shareholder, Gas (BVI), appointed a
        new
        board of directors, consisting of: Messrs. Liu Yu Chuan, Chen Guo Wei, Sun
        Quan
        Dong and John D. Kuhns, and Ms. Chen Fang.
 
 ***Share
        Exchange Transaction and Issuance and Conversion of Series A Convertible
        Preferred Stock***
 
 On
        September 7, 2006, we entered into and consummated a share exchange agreement
        with the holders of all of the outstanding capital stock of Gas (BVI), which
        were: Eloten Group Ltd., Leading King Investment Limited, Zhong Zhi Min,
        Li Shu
        Wang, Chen Si, Xiang Shun Ying, Chong Shun, Liu Xiao Bing, Zhuo Qing Hui,
        Bian
        Shu Kui, Chen Fang, Shang Jian Zhong and Wang Wei Dong, or, collectively,
        the
        Gas (BVI) shareholders.
 
 Pursuant
        to the terms of the share exchange agreement, we issued 14,361,646 shares
        of our
        series A convertible preferred stock to the Gas (BVI) shareholders in exchange
        for the 9,950,000 shares of common stock of Gas (BVI) held by the Gas (BVI)
        shareholders, which constituted all of Gas (BVI)’s capital stock. Each share of
        series A convertible preferred stock was converted automatically into one
        share
        of our common stock, par value $0.001 per share, upon the completion of the
        304.44-for-1 reverse stock-split of our common stock on November 17, 2006.
        Therefore, the shares of series A convertible preferred stock issued to the
        Gas
        (BVI) Shareholders were automatically converted into an aggregate of 14,361,646
        shares of our common stock.
 
 6
 As
        a
        result of the consummation of the share exchange transaction, we ceased being
        a
        shell company as that term is defined in Rule 12b-2 under the Exchange Act,
        Gas
        (BVI) is now our wholly-owned subsidiary, and Beijing Gas is now our indirectly
        wholly-owned subsidiary in the PRC.
 
 The
        foregoing description of the share exchange agreement is qualified in its
        entirety by the text of the agreement, which is annexed hereto as Exhibit
        10.1.
 
 ***Private
        Financing Transactions and Issuance of Series B Convertible Preferred
        Stock***
 
 On
        September 7, 2006, we entered into and closed a stock purchase transaction
        with
        Vision Opportunity Master Fund, Ltd., SEI Private Trust Co. FAO - The JM
        Smucker
        Co. Master Fund, and Coronado Capital Partners LP, pursuant to which we issued,
        for an aggregate of $6,876,800 in gross cash proceeds, to the investors,
        an
        aggregate of 2,509,782 shares of our series B convertible preferred stock,
        and
        series A, B, J, C and D warrants to purchase shares of our common stock as
        described below, and to Kuhns Brothers, Inc. and its designees, an aggregate
        of
        635,822 shares of our series B convertible preferred stock, and warrants
        to
        purchase shares of our common stock as described below.
  On
        October 20, 2006, we entered into and closed a stock purchase transaction
        with
        Vision Opportunity Master Fund, Ltd., Nite Capital LP and Ijaz Malik, pursuant
        to which we issued to the investors, for an aggregate of $2,404,800 in gross
        cash proceeds, an aggregate of 877,664 shares of our series B convertible
        preferred stock, at $2.74 per share, and series A, B, J, C and D warrants
        as
        described below.
 
 The
        Series A warrants allow their holders to purchase an aggregate of 3,854,599
        shares of our common stock at $3.84 per share. The Series B warrants allow
        their
        holders to purchase an aggregate of 1,693,723 shares of our common stock
        at
        $5.48 per share. The Series J warrants allow their holders to purchase an
        aggregate of 3,083,588 shares of our common stock at $3.01 per share. The
        Series
        C warrants allow their holders to purchase an aggregate of 3,083,588 shares
        of
        our common stock at $4.22 per share. The Series D warrants allow their holders
        to purchase an aggregate of 1,541,794 shares of our common stock at $6.03
        per
        share.
 
 The
        series A and B warrants are exercisable for a term of five years. Each series
        J
        warrant is exercisable for a period of twelve (12) months following its
        issuance. Each series C or D warrant is only exercisable once the holder
        has
        exercised his or its series J warrant, and for the same number of shares
        of
        common stock that the holder’s series J warrant was exercised for. The terms of
        the series C and D warrants are for five years following the date of issuance
        of
        such series C or D warrants, as applicable.
 
 Subject
        to certain conditions, at the option of the holders of the series B convertible
        preferred stock, each share of the series B convertible preferred stock is
        convertible into one share of our common stock after giving effect to the
        304.44-for-1 reverse stock-split of our common stock. Therefore, the shares
        of
        the series B convertible preferred stock issued in the above-described private
        financing transactions are convertible into an aggregate of 4,023,268 shares
        of
        common stock, after giving effect of the 304.44-for-1 reverse stock-split
        of our
        common stock.
 
 The
        private financing transactions were consummated on substantially similar
        terms
        and conditions. As a result of the consummation of these private financing
        transactions, we issued an aggregate of 4,023,268 shares of series B convertible
        preferred stock and series A, B, J, C and D warrants exercisable for purchase
        of
        an aggregate of 13,257,293 shares of our common stock in exchange for an
        aggregate of $9,281,600 gross cash proceeds. As of March 12, 2007, a total
        of 227,697 of our series B convertible preferred shares have been converted
        into
        our common stock, and none of our warrants have been exercised for our common
        stock. The following is a summary of the material terms of the material
        agreements that we entered into with the investors in the private financing
        transactions:
 
 1.
              Stock
                  Purchase Agreement
 
 Pursuant
        to the stock purchase agreements that we entered into with the investors
        of our
        series B convertible preferred stock closed on September 7, 2006 (as amended
        on
        October 3, 2006) and October 20, 2006, respectively, after the closing of
        these
        transactions, we are required to take certain actions for the benefit of
        the
        holders of the series B convertible preferred stock, among other
        things:
  7
 (a)
        Board
        Observer Rights. Vision Opportunity Master Fund, Ltd. shall have the right
        to
        have a representative serve as an observer of our board of
        directors.
 
 (b)
        Investor and Public Relations. We are to deposit or cause to be deposited
        $500,000 of the funds raised in the private financing in a separate escrow
        account with a separate escrow agent to be used us in connection with investor
        and public relations.
  (c)
        Revenue Targets. We are to establish an adjustment escrow account in our
        name in
        which we will deposit 2,353,518 shares of our common stock to be issued to
        the
        investors in the series B private financing transactions, as adjustment shares
        with respect to our audited earnings after taxes. The adjustment escrow account
        will be managed by a third party law firm acting as escrow agent. In the
        event
        that (A) our earnings after taxes for our 2006 fiscal year are less than
        $5,795,000 or (B) (i) if, by the end of our 2007 fiscal year we have raised
        not
        less than $20 million through the exercise of warrants or through an equity
        or
        debt offering, our earnings after taxes for our 2007 fiscal year are less
        than
        $9,120,000 or (ii) if we have not raised at least $20 million as described
        above, our earnings after taxes for our 2007 fiscal year are less than
        $7,900,000, then we will issue or cause to be issued from the adjustment
        escrow
        account in each instance 1,176,756 adjustment shares; provided, however,
        that if
        by the end of our 2007 fiscal year we have raised at least $20,000,000 in
        debt
        financing, we will issue or cause to be issued one-half of the adjustment
        shares
        that would otherwise be due. The adjustment shares will be issued to the
        purchasers of the series B convertible preferred stock in the foregoing private
        financing transactions in proportion to their purchases of the series B
        convertible preferred stock promptly following public disclosure that such
        revenue target has not been achieved. In addition, if we determine to proceed
        with the preparation and filing of a registration statement under the Securities
        Act of 1933, as amended, in connection with the proposed offer and sale of
        any
        of our securities by us or any of our security holders (other than a
        registration statement on Form S-4, S-8 or other limited purpose form),
        then we will cause all such adjustment shares to be included in such
        registration statement, all to the extent requisite to permit the resale
        by the
        purchasers of the series B convertible preferred stock of such adjustment
        shares.
  (d)
        Ratchet Provision. In the event we, at any time within two (2) years following
        the closing of the respective private financing transactions, issue or sell
        any
        additional shares of our common stock, at a price per share less than $2.74
        or
        without consideration, then the conversion rate for the series B convertible
        preferred stock will be adjusted so that the number of shares of common stock
        issuable upon such conversion of the series B convertible preferred stock
        will
        be increased in proportion to such increase in outstanding shares of common
        stock.
  (e)
        Right
        of First Refusal. For a period of two (2) years following the effective date
        of
        the registration statement providing for the resale of the shares of common
        stock issuable upon conversion of the series B convertible preferred stock
        and
        the shares of common stock issuable upon exercise of the warrants, we will
        provide the purchasers of the series B convertible preferred stock in the
        foregoing private financing transactions a right of refusal as to any proposed
        offer or sale to any third party by us, of our common stock or any debt or
        equity securities convertible, exercisable or exchangeable into our common
        stock, with certain exceptions.
 
 The
        foregoing description of the stock purchase agreements is qualified in its
        entirety by the text of these agreements and amendments thereto, which are
        annexed hereto as Exhibits 4.1, 4.4, 4.5 and 4.6.
 
 2.
              Registration
                  Rights Agreements
 
 In
        connection with the stock purchase agreements, we entered into registration
        rights agreements with the investors of the series B convertible preferred
        stock
        on September 7, 2006 (as amended on October 3, 2006) and October 20, 2006,
        respectively. Pursuant to these registration rights agreements, we are required
        to file with the SEC a "resale" registration statement on Form SB-2, providing
        for the resale of all shares of our common stock issuable upon conversion
        of the
        series B convertible preferred stock and shares of our common stock issuable
        upon exercise of our warrants, and 1,314,405 shares of common stock issued
        upon
        conversion of series A convertible preferred stock issued to certain
        shareholders of Gas (BVI) in exchange for the shares of Gas (BVI) held by
        such
        shareholders pursuant to the share exchange transaction.
 
 We
        are
        obligated to file such registration statement by the 50 th day
        following the closing of the respective private financing transactions. In
        the
        event that the registration statement receives a “full review” from the SEC and
        is not effective within 200 days of the closing date of the respective private
        financing transaction, we will be obligated to pay an amount in cash as
        liquidated damages to the applicable investor equal to two percent (2%) for
        each
        calendar month (prorated for shorter periods) of such investor’s initial
        investment in the series B convertible preferred stock (with a cap of 20%)
        until
        the registration statement is effective. In the event that the registration
        statement does not receive a full review by the SEC, with respect to an investor
        in the series B convertible preferred stock, the foregoing penalty will begin
        to
        accrue 140 days after the closing of the private financing transaction in
        which
        such investor participated.
  8
 As
        of the
        date of this annual reportannual report, we have not registered all of the
        shares under the registration rights agreement, and we are nearing the 200-day
        deadline for registration. We are currently pursuing discussions with the
        holders of these shares. If these discussions are not successful, however,
        we
        could be required to pay penalties according to the terms of the registration
        rights agreement.
 
 The
        foregoing description of the registration rights agreements is qualified
        in its
        entirety by the text of the agreements, which are annexed hereto as Exhibits
        4.2
        and 4.7.
  3.
              Lock-Up
                  Agreement.
 
 Simultaneously
        and in connection with our entry into the stock purchase agreement on September
        7, 2006, we entered into a Lock-Up Agreement with the Gas (BVI) Shareholders,
        pursuant to which the Gas (BVI) Shareholders agreed to not transfer any of
        the
        shares of our common stock issuable upon conversion of the series A convertible
        preferred stock issued to the Gas (BVI) Shareholders in the share exchange
        transaction as described above during the period commencing on the closing
        date
        of the stock purchase agreement and expiring on the date that is the later
        of
        one year following the closing date of the stock purchase agreement or six
        months following the effective date of the registration statement filed by
        us
        with the SEC providing for the resale of the shares of common stock issuable
        upon conversion of the series A convertible preferred stock and exercise
        of any
        warrants; provided, however, that no Gas (BVI) Shareholder shall, during
        the
        twelve (12) months following such period, sell more than one-twelfth of their
        total holdings of our common stock or series A convertible preferred stock
        during any one month.
 
 The
        foregoing description of the Lock-Up Agreement is qualified in its entirety
        by
        the text of the agreement, which is annexed hereto as Exhibit 4.3.
  As
        a
        result of the consummation of the reverse merger transaction, we are now
        engaged
        in the development of natural gas distribution systems in small- and
        medium-sized cities in China, as well as the distribution of natural gas
        to
        residential, commercial and industrial customers in China, through our
        indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.
        We
        still own Pegasus Tel, but intend to spin it off in the form of a dividend
        to
        our shareholders of record as of August 30, 2006.
 
 **Organizational
        History of Gas (BVI) and Beijing Gas**
 
 Gas
        (BVI)
        was incorporated on June 19, 2003 in the Territory of the British Virgin
        Islands
        with Mr. Liu Yu Chuan as its sole shareholder. Gas (BVI) is the holding company
        for Beijing Gas. Prior to the acquisition of all of the equity interests
        of
        Beijing Gas by Gas (BVI) as described below, Gas (BVI) had no business
        operations, assets or liabilities, apart from organizational expenses and
        fees.
  Beijing
        Gas was originally formed as a limited liability company under the laws of
        the
        PRC in 2001 under the name Beijing Yuan Wang Yu Cheng Construction Ltd.,
        and
        changed its name to its current name, Beijing Zhong Ran Wei Ye Gas Co. Ltd.,
        in
        June 2003.  On February 17, 2004, Gas (BVI) acquired all the outstanding
        capital stock of Beijing Gas from its then shareholders. On July 14, 2004,
        Gas
        (BVI) transferred 1% of the capital stock of Beijing Gas to Shen Zhen Shen
        Qi
        Cheng Tong Investment Ltd., a limited liability company organized under the
        laws
        of the PRC (“Shen Zhen Shen Qi”), and, simultaneously, Shen Zhen Shen Qi
        invested RMB 20 million in Beijing Gas in exchange for 50% of its capital
        stock.
        As a result, Gas (BVI) and Shen Zhen Shen Qi held 49% and 51% of the capital
        stock of Beijing Gas, respectively. On April 30, 2006, Gas (BVI) acquired
        all of
        the capital stock of Beijing Gas held by Shen Zhen Shen Qi in exchange for
        RMB
        20.4 million. As a result of this transaction, Beijing Gas is now a “wholly
        foreign owned entity” under PRC law by virtue of its status as a wholly-owned
        subsidiary of Gas (BVI).
  Beijing
        Gas has subsidiaries, known as project companies, in four provinces, and
        four
        branch offices in Beijing. The project companies are the operating subsidiaries
        of Beijing Gas. Each project company operates as a local natural gas distributor
        in a city or county, which we refer to as an operational location, pursuant
        to
        an exclusive franchise agreement with the local government or entities
        responsible for administering and/or regulating gas utilities, pursuant to
        which
        Beijing Gas is granted the exclusive right to develop and operate natural
        gas
        distribution systems and distribute natural gas at the operational location.
  9
 Each
        of
        the project companies is organized as a limited liability company under PRC
        law
        with Beijing Gas holding an equity interest of 85% to 100% and an individual
        shareholder nominally holding the remainder of the equity interest in such
        project company. Each such individual shareholder has relinquished any and
        all
        rights, power and interest of a shareholder in the respective project companies
        under enforceable contracts. This structure was intended to comply with a
        PRC
        law that required a limited liability company to have at least two shareholders,
        which requirement was removed in January 2006. Beijing Gas intends to cause
        the
        individual shareholders to transfer their shares in each of the project
        companies back to Beijing Gas in the near future.
 
 In
        addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
        Ke
        Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
        venture entity engaged in the business of development, licensing and sale
        of oil
        and gas technologies and equipment, and sale of self-produced
        products.
 
 Set
        forth
        below are the subsidiaries of Beijing Gas:
  **Subsidiary**
              
              **Beijing**
                **Gas’s**
                **Equity**
                **Interest**Yu
                  Tian county Zhong Ran Wei Ye Gas Ltd.
              
              
              90
              %Ning
                  Jing Wei Ye Gas Ltd.
              
              
              95
              %Xing
                  Tang County Wei ye Gas Ltd.
              
              
              95
              %Lin
                  Zhang County Wei Ye Gas Ltd.
              
              
              85
              %Jin
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Wu
                  Qiao County Gas Ltd.
              
              
              95
              %Long
                  Yao County Zhong Ran Wei Ye Gas Ltd.
              
              
              95
              %Shen
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Pei
                  County Wei Ye Gas Ltd.
              
              
              90
              %Si
                  Hong Wei Ye Gas Ltd.
              
              
              95
              %Si
                  Shui Wei Ye Gas Ltd.
              
              
              95
              %Lang
                  Fang Development Zone Wei Ye Dangerous Goods Transportation Ltd.
              
              
              95
              %Beijing
                  Zhong Ran Xiang Ke Gas Technology Ltd.
              
              
              40
              %Zhangjiakou
                  City Xiahuayuan Jinli Gas Ltd. Co.
              
              
              100
              %Yuxian
                  Jinli Gas Ltd. Co.
              
              
              100
              %Beijing
                  Chenguang Gas Ltd., Co.
              
              
              100
              %Changli
                  Gas Co. Ltd.
              
              
              100
              %Hengshui
                  Gas Co. Ltd.
              
              
              100
              %
 
  **Recent
        Developments**
 
 In
        January, 2007, we formed two companies incorporated under the laws of the
        British Virgin Islands: Sino Gas Construction Ltd. and Sino Gas Investment
        Development Ltd., both of which are 100% owned by Sino Gas. Sino Gas
        Construction Ltd. acquired 100% of the common stock of Beijing Chenguang
        Gas
        Co., Ltd. in January 2007.
 
 On
        November 30, 2006, we granted an option to purchase 100,000 shares of our
        common
        stock at $3.00 per share to CCG Partners, LLC, as partial consideration for
        investor relations services it is providing to us.
 
 On
        October 19, 2006, our Board of Directors met and approved the establishment
        of
        an Audit Committee and a Compensation Committee of the Board. At the same
        meeting, the Board approved the resignation of Shu-wang Li from the position
        of
        Chief Operating Officer of the Company, and appointed Zhi-cheng Zhou as the
        new
        Chief Operating Officer of the Company.
 
 10
  On
        December 17, 2006, Beijing Gas acquired 100% of the common shares of two
        natural
        gas companies operating in Hebei Province, Hebei Jinli Xiahuayuan Gas Co.,
        Ltd.,
        and Hebei Jinli Yuxian Gas Co., Ltd., both of which became its operating
        subsidiaries.
 
 In
        December 2006, Beijing Gas set up two new domestic subsidiaries: Changli
        Gas
        Co., Ltd. and Hengshui Gas Co., Ltd.
 
 In
        December 2006, our board of directors approved an employee compensation plan,
        which granted to employees options to purchase a total of 1.86 million
        shares of our common stock over a three-year period.
 
 
 **PRC Natural
        Gas Industry Overview**
 
 ***Sources
        of Energy***
 
 Although
        the PRC is the world’s second largest energy consumer, its energy consumption
        per capita is lower than the per capita level in most other countries. This
        is
        largely due to the fact that a large portion of the Chinese population lives
        in
        rural areas where access to energy sources is limited and the energy supply
        infrastructure in the PRC is still relatively underdeveloped. Energy consumption
        is concentrated in the urban areas where there is greater access to energy
        sources.
 
 Traditionally,
        the PRC has relied heavily on coal and crude oil as its energy sources.
        According to the China Statistical Yearbook, in 2004, coal, crude oil,
        hydro-electricity and natural gas accounted for 65.0%, 23.2%, 8.8% and 3%,
        respectively, of the PRC’s total energy consumption. In 2003, the ratios were
        68.0%, 23.0%, 7.9% and 2.5% respectively. Traditionally, natural gas has
        been
        primarily used as a raw material for chemical fertilizer and to operate oil
        and
        gas fields. Accordingly, most natural gas is consumed for production of
        fertilizer. Only a little over 10% of natural gas is consumed as a fuel for
        cogeneration and residential use. (Source: The Institute of Energy Economics
        of
        Japan).
 
 The
        PRC’s
        heavy reliance on coal is out of line with world consumption rates for the
        same
        time period which was 22.2% (Source: Energy Information Administration, U.S.
        Department of Energy). The use of coal, however, causes air pollution and
        other
        negative consequences to the environment. In the PRC, the heavy use of unwashed
        coal has lead to large emissions of sulfur dioxide and particulate matter.
        An
        air pollution study conducted by the World Health Organization in 1998 showed
        that seven of the 10 most polluted cities in the world were located in the
        PRC.
        As such, there have been serious environmental concerns in many countries
        around
        the world and resulted in a global trend to reduce coal usage. In consideration
        of such trends, the PRC set out a policy to raise the share of natural gas
        in
        the country’s energy mix in its Ninth 5-Year Plan (1996-2000). At the local
        government level, in many locations where natural gas supply is available,
        local
        governments often require all new residential buildings to incorporate piped
        gas
        connections in their designs as a condition to the issuance of the construction
        or occupancy permits. Before 2000, the gas distribution had principally been
        served by local municipal governments. Since then, the industry has been
        open to
        private sector, whose investments have fostered the wide use of natural gas
        in
        thePRC. The natural gas industry has been deemed by the PRC government as
        a
        suitable industry for public and private investments.
 
 ***China’s
        Natural Gas Reserves and Gas Pipeline Infrastructure***
 
 Recognizing
        the serious problems caused by heavy reliance on coal usage, the PRC government
        has aggressively moved to reduce coal usage by substituting coal with other,
        more environmentally friendly forms of fuel, such as natural gas. The PRC
        abounds in rich natural gas reserves, which are distributed principally in
        Xinjiang, Sichuan and Inner Mongolia in western and north-central China.
        According to the Second Oil and Gas Reserve Assessment published by the
        Geological and Mineral Resources Department of China, natural gas reserves
        in
        China are estimated to be 38,000 billion cubic meters with 30,000 billion
        cubic
        meters onshore and 8,000 billion cubic meters offshore. These reserves are
        sufficient for 74 to 120 years of Chinese consumption based on current
        consumption levels.
 
 Because
        the PRC’s largest reserves of natural gas are located in western and
        north-central China, it requires a significant investment in gas transportation
        infrastructure to carry natural gas to eastern cities and the rest of the
        PRC.
        Until recent years, the PRC’s natural gas consumption was limited to local
        natural gas producing provinces because of the lack of national long-distance
        pipeline infrastructure. For example, Sichuan province, which is well known
        for
        its production of natural gas, has a local gas transport network. In the
        northwest, areas near the Daqing field in Heilongjiang province and the Liaohe
        oil field in Liaoning province have benefited from associated gas sent via
        gas
        pipeline. Because natural gas transportation was limited to areas near
        production sites, low cost gas supply was possible.
  11
  The
        principal method for transportation of natural gas from a source to end users
        is
        by means of pipelines. In order to develop the natural gas industry, it is
        essential that the necessary pipeline infrastructure be in place so that
        natural
        gas is easily accessible for distribution to end users at affordable cost.
 
 In
        accordance with the PRC government’s Tenth 5-Year Plan (2001-2005), the
        country’s longest pipeline, known as the West-East Pipeline, was constructed and
        went into operation in January 2005. It transports natural gas to demand
        centers
        in the southeast from deposits in the western Xinjiang province to Shanghai,
        picking up additional gas in the Ordos Basin along the way. The West-East
        Pipeline starts at Lunnan in the Xinjiang Autonomous Region and ends at Baihe
        Town in Shanghai. It travels through 10 provinces including Xinjiang, Gansu,
        Ningxia, Shaanxi, Shanxi, Henan, Anhui, Jiangsu, Zhejiang and Shanghai. The
        full
        length of the pipeline is about 4,200 km with a designed annual throughput
        capacity of 20 billion cubic meters, a delivery pressure of 10 megapascals
        and 35 processing stations along the pipeline.
  There
        are
        other pipelines linking smaller natural gas deposits to consumers, such as
        the
        pipeline linking the Sebei natural gas field in the Qaidam Basin with consumers
        in the city of Lanzhou, Ganshu province in the northwest, and a pipeline
        linking
        natural gas deposits in Sichuan province in the southwest to demand centers
        in
        Hubei and Hunan provinces in the central PRC.
  In
        its
        Eleventh 5-Year Plan (2006 - 2010), the PRC government re-affirmed its
        commitment to making significant investments in the expansion of the natural
        gas
        pipeline infrastructure over a period of 20 years.
 
 ***The
        Gas Delivery Process***
 
 The
        natural gas delivery process is categorized by three segments: production,
        transmission and distribution. Production involves underground exploration,
        drilling, extraction and purification of the natural gas. After extraction
        from
        a gas well, natural gas is transported to nearby refineries for removal of
        water
        and other impurities. The natural gas is then transported from the refineries
        via long distance pipelines under extremely high pressure facilitating the
        supply to a large number of locations near these pipelines at high speeds.
        The
        long distance pipelines are owned and operated by PRC state owned oil and
        gas
        exploration and production companies.
 
 Distribution
        companies (such as Beijing Gas) distribute natural gas to end users and often
        own the gas pipeline infrastructure rights of an operational location (including
        the intermediate pipelines, the processing stations, the main pipelines and
        the
        branch pipelines). A distribution company purchases natural gas from oil
        and gas
        exploration and production companies. The distribution company determines
        the
        method of delivering natural gas to its desired destination after taking
        into
        account factors such as the distance between the collection and delivery
        points
        and the expected demand for gas from the relevant gas supply
        locations.
 
 The
        collection of CNG and LNG involves the delivery of the gas by truck from
        gas
        wells or stations located along the relevant long distance pipeline to a
        processing station. If an intermediate pipeline is constructed, the intermediate
        pipeline transports the natural gas under high pressure to a processing station.
        Such processing stations may contain CNG or LNG pressure regulating facilities
        which will depressurize the CNG or LNG to natural gas under medium pressure
        and/or natural gas pressure regulating facilities to reduce the pressure
        of
        natural gas from high pressure to medium pressure, before transferring the
        natural gas to a local pipeline.
 
 The
        processing station is usually located on the outskirts of an operational
        location for safety reasons and it provides certain ancillary
        facilities:
 
 ·
              To
                  add bromine to the gas to enable the detection of leakages when
                  the gas is
                  transmitted through the main pipelines, and
  12
  ·
              To
                  store gas under high, medium or low pressure to be used as reserves
                  for
                  future unexpected fluctuation in demand.
  High
        pressure gas storage tanks usually have thicker walls and therefore, are
        more
        expensive to construct than gas storage tanks for storage of gas under medium
        or
        low pressure.
 
 After
        processing, the gas is transmitted under medium pressure to the local pipelines.
        Local pipelines are laid within an operational location and represent the
        backbone of the local gas delivery system. Different sections of the local
        pipelines operate at slightly different pressures, with computer controlled
        regulators controlling the flow of natural gas for delivery to end users
        via the
        branch pipelines and customers’ pipelines.
  When
        there is a demand for a connection of gas to a particular area within a gas
        supply location, the distribution company will invest in the construction
        of the
        branch pipelines to connect the main pipelines to the pressure regulating
        boxes
        located in the end-users’ buildings or premises. The pressure regulating box
        reduces the natural gas to a lower pressure before the natural gas is
        transmitted to the customers’ pipelines. Customers’ pipelines transmit the
        natural gas through the pressure regulating box to the end users.
 
 ***Demand
        for Natural Gas***
  Currently,
        natural gas consumption in the PRC accounts for less than 3% of its total
        energy
        consumption. However, driven by environmental pressure from the demand side
        and
        improvements in social infrastructure with economic growth, in the west in
        particular, and stable energy supply, it is anticipated that the use of natural
        gas will grow very rapidly in the PRC over the next 20 years.
 
 ***Natural
        Gas Suppliers***
 
 There
        are
        approximately 60 natural gas supply companies in the PRC. Among them, China
        National Petroleum Corporation Group (“CNPC”), China Petroleum and Chemical
        Corporation Group (“Sinopec”), and China National Offshore Oil Corporation Group
        (“CNOOC”) account for more than 90% of the total national production. In 2002,
        production by CNPC, Sinopec and CNOOC accounted for 68.9%, 15.2% and 11.4%,
        respectively, of the total national production. CNPC and Sinopec own and
        primarily operate onshore pipelines while CNOOC owns and operates virtually
        all
        off shore pipelines. Before 2000, the gas distribution had been principally
        served by local municipal governments. Since then, natural gas industry has
        been
        designated by the PRC government as a suitable industry for public and private
        investment and has been open to private investment which has fueled the
        development of the industry and fostered a wider use of natural gas in the
        PRC.
 
 **Our
        Business Activities**
 
 Our
        business projects proceed in three stages, ending in our eventual ownership
        and
        operation of a natural gas distribution system in a given operational location:
 
 1.
        Development—(i) identifying distribution opportunities by conducting preliminary
        reviews and feasibility studies of new operational locations, and (ii) securing
        authorization by and/or franchise arrangements with local governments,
        negotiating supply agreements with potential customers, and implementing
        the
        related documentation;
 
 2.
        Construction—building both natural gas storage and distribution networks; and
 
 3.
        Operations—supply and sale of natural gas and related services to customers at
        the operating location.
 
 ***Development***
 
 (i) *Identifying
        distribution opportunities in new operational location:* Our
        business development team actively explores and identifies suitable areas
        of
        service by conducting market research on potential operational locations
        where
        the demand for piped natural gas is desired. Because of experience and ongoing
        cooperation with governmental authorities, we also receive invitations from
        local governments to bid for new natural gas projects or to take over existing
        natural gas projects.
  13
  As
        the
        piped natural gas supply industry in the PRC is still in the early stages
        of
        development, most areas in the PRC are not yet supplied with piped natural
        gas
        even though they may be in close proximity to natural gas sources. Due to
        the
        capital intensive nature of new natural gas distribution projects, we are
        very
        selective in our choices for new operational locations.
 
 The
        selection of new operational locations is determined after conducting
        preliminary evaluation and studies on the target locations, and return on
        investment. The criteria for any potential operational location that are
        investigated and documented by us are:
 
 1.
              Size
                  and density of population.
 
 2.
              Economic
                  statistics of the targeted
                  locations.
 
 3.
              Extent
                  and concentration of industrial and commercial
                  activities.
 
 4.
              New
                  property development in the target
                  location.
 
 5.
              Projected
                  levels of connection fees and gas usage
                  charges.
 
 6.
              Extent
                  of the local government’s commitment to environmental protection,
                  environmental policies in place, and the local population’s awareness of
                  environmental issues.
 
 7.
              A
                  determination of exclusive operational rights and preferential
                  treatment
                  on tax and governmental fees.
 
 8.
              Types
                  of gas supply (piped natural gas, CNG or LNG) and methods of delivery.
                  Intermediate pipeline is used if the gas source, or long distance
                  pipeline, is located within 100 km. CNG trucks are deployed if
                  the gas
                  source, or long distance pipeline, is located within 300 km. There
                  is no
                  distance restriction for LNG delivery. Generally, LNG trucks are
                  used if
                  the gas source, or long distance pipeline, is located beyond 300
                  km.
 
 9.
              For
                  an acquisition of existing natural gas projects, the cost of acquisition,
                  quality of assets and/or business are also valued. In addition,
                  the
                  liabilities of the business are analyzed along with any other perceived
                  or
                  actual problems encountered.
 
 Based
        on
        the findings of the investigation, our business development team will decide
        whether to make a recommendation to management for approval to proceed with
        discussions and negotiations on a new project. We have conducted dozens of
        preliminary evaluations since our inception in 2003. We have an aggregate
        of 26
        completed or partially completed operational locations and 12 operational
        locations under development.
 
 *(ii)
        Securing a New operational location.* Once
        we
        have approved a potential natural gas distribution project in an operational
        location, we normally set up a local independent subsidiary, also know as
        a
        project company, to administer the project for its lifetime. We then prepare
        and
        submit a detailed gas project proposal to the local government and commence
        negotiations on major issues such as the granting of exclusive rights or
        rights
        of first refusal to supply gas to that location, proposed connection fees
        and
        gas usage charges and whether any tax and other concessions or favorable
        policies will be granted by the local government. Once established, the project
        company will conduct a series of marketing and promotional campaigns (which
        may
        include joint promotional campaigns with the local government) to increase
        public awareness of piped natural gas in the operational location. Concurrently,
        we begin actively seek out potential customers in the operational location
        and
        negotiate the terms of supply contracts with the aim of entering into supply
        contracts as soon as possible with such customers.
 
 ***Construction***
  *(i)
        Design stage.* **** The
        design of the gas pipeline infrastructure for a natural gas distribution
        project
        includes the processing stations, the local pipelines and other ancillary
        facilities such as gas storage tanks. It is carried out by a government approved
        design institute in accordance with our requirements and specifications.
        It also
        takes into account the local population size, the development of the economy,
        the utilization of energy resources and the environmental conditions. The
        design
        takes into consideration our technical requirements, the needs of the local
        population and the environmental conditions of the area covered by the design.
        The master design is subject to approval by the local city construction
        department. The design stage normally takes two to three months.
  14
  *(ii)
        Construction Stage.* **** Once
        the
        design is approved, we invite independent qualified contractors to tender
        bids
        for the construction work. The selection criteria for the contractors include
        their qualifications, experience, expertise, reputation, familiarity with
        the
        local environment, prior experience with us and price. We generally enter
        into
        turnkey contracts with independent contractors for construction, installation
        and maintenance of the natural gas pipelines. We pay a down payment with
        the
        remainder to be paid upon completion of the project. At the time of entering
        into turnkey contracts, we source raw materials such as piping, gas regulating
        equipment and machinery. We have strict quality control procedures for the
        sourcing of supplies for all construction purposes.
 
 Our
        internal engineers and independent external inspectors monitor the entire
        construction process to ensure that each stage of construction meets our
        quality
        and safety standards and the relevant regulatory requirements.
 
 For
        a
        given operational location, although the gas pipeline infrastructure is designed
        to cover the entire operational location, our construction program focuses
        on
        early gas delivery to areas of concentrated customer demand within such
        operational location. This ensures that natural gas supply can begin as soon
        as
        the essential gas pipeline infrastructure and facilities such as the processing
        stations and the intermediate pipelines are completed. Construction work
        in a
        target area will gradually extend to cover the whole operational location,
        which
        typically takes two to five years.
 
 ***Operation***
 
 Once
        the
        necessary gas pipeline infrastructure is in place in a given operational
        location, we begin the design and construction of the branch pipelines and
        customers’ pipelines pursuant to gas supply contracts with customers. The
        designs of branch pipelines and customers’ pipelines are normally prepared by
        us, reviewed by a government approved design institute, and carried out by
        external contractors. Upon completion of the construction of the branch
        pipelines and customer pipelines in the operational location, we begin to
        supply
        and sale natural gas and related services to customers within the operational
        location pursuant to supply contracts with such customers.
 
 **Gas
        Distribution System**
 
 The
        chart
        below illustrates our gas distribution system. We purchase gas from our
        suppliers, which are state-owned petroleum companies, at their processing
        centers close to our operational locations. The natural gas we purchase is
        compressed from piped natural gas into CNG or LNG and placed in canisters.
        We
        then transport the CNG and LNG by truck to our processing stations in various
        operational locations for storage, decompression and gasification. From those
        locations, the gas is transported through our pipeline system to our end
        users.
  15
  
  **Products
        and Services**
 
 Presently,
        we generate revenues primarily from the sale of connection services to end
        users’ pipelines to our natural gas distribution system for which we charge
        connection fees, and sale of natural gas for which we charge the customers
        based
        on usage.
 
 Historically,
        connection fees and sales of natural gas have constituted more than 90% of
        our
        total revenues. We recorded connection fees in the amounts of $7.22 million
        and
        $8.2 million for the fiscal years ended December 31, 2006 and 2005,
        respectively, constituting 66% and 75.2% of total revenues for those years.
        Sales of natural gas were $3.65 million and $2.7 million for the fiscal years
        ended December 31, 2006 and 2005, respectively, constituting 34% and 24.8%
        of
        the total revenues for those years.
 
 **Sales
        and Marketing**
 
 Our
        main
        sales office, which is located in Beijing, is responsible for managing our
        overall sales and devising our marketing strategy. We establish a project
        company at each operational location and the local sales and marketing team
        for
        each project company works together with the main office team to structure
        an
        appropriate plan accommodating the specific needs and circumstances of the
        operational location. The sales and marketing team is responsible for company
        image and brand building, as well as promoting the advantages and concept
        of
        using natural gas as a necessary part of modern day life. Once established,
        a
        project company will implement a series of promotional campaigns (which may
        include joint promotional campaigns with the local government) to increase
        public awareness of piped natural gas in an operational location. At the
        same
        time, the project company begins to actively seek out potential customers
        in the
        operational location and negotiate the terms of supply contracts with the
        aim of
        entering into supply contracts with such customers as soon as
        possible.
  16
  Our
        marketing team plays an active role in lobbying the relevant government
        authorities during the negotiation stage.
 
 **Materials
        and Suppliers**
 
 ***Natural
        Gas***
 
 The
        principal supplies purchased for our business are natural gas, pipes, machinery
        and equipment. Purchase of natural gas represented 65% and 61.64% of our
        total
        purchase of supplies for the for the fiscal years ended December 31, 2006
        and
        2005, respectively. Generally, approximately 99% of the natural gas we purchase
        is CNG and approximately 1% is LNG.
 
 Our
        principal CNG supplier has been the Fourth Oil Extraction Plant of the North
        China Oilfield (the “North China Oilfield”), a subsidiary of Petro China. Our
        LNG supplier has been Henan Zhong Yuan Lu Ye Advanced Technology Ltd. Co.
        (“Henan Zhong Yuan”). Historically, we have purchased approximately 90% of our
        total purchases of CNG from North China Oilfield and 100% of our total purchases
        of LNG from Henan Zhong Yuan.
 
 We
        have
        long-term supply contracts with these suppliers and have not experienced
        any
        shortage of natural gas supply in the past. To prepare for growth, we have
        also
        entered into agreements with new suppliers to meet our growing demands.
 These contractual relationships with our suppliers allow us to pursue
        natural gas distribution projects in a wide range of operational locations.
 
 The
        wholesale price of natural gas is agreed upon between the suppliers and us
        with
        reference to the wellhead price, distance of transportation, purification
        fees
        and the supplier’s operating costs. The wellhead price of natural gas, which is
        determined by the PRC State Development and Planning with approval from the
        PRC
        State Council, is currently set at $0.12 per cubic meter with a 10% allowance
        for upward or downward adjustments as a result of negotiations between suppliers
        and distribution companies, such as Beijing Gas. Generally, we are only required
        to pay for the actual quantity purchased and there is no penalty should we
        purchase less than the stated amount.
 
 ***Pipes,
        Machinery and Equipment***
 
 We
        purchase pipes of various size and thickness domestically for installation
        in
        different segments of our natural gas pipeline infrastructure according to
        specifications that comply with PRC standards and regulations. We also purchase
        machinery and equipment, both domestically and abroad. Machinery and equipment
        are sourced domestically and internationally from the United States and Europe.
        Payments for equipment, pipes and machinery are purchased with credit terms
        ranging from 30 to 90 days.
 
 ***Gas
        Appliances***
 
 As
        residential customers often require us to provide gas appliances such as
        gas
        meters, we purchase gas appliances in bulk directly from manufacturers in
        China
        and maintain a limited inventory of them. We also provide repair and maintenance
        service to the gas appliances supplied. We generally provide a one-year warranty
        of our gas distribution system to our customers, during which time we provide
        free check-ups of the pipeline and repair for any appliances we provided.
 
 **Customers**
 
 We
        have
        two principal types of customers: (i) residential customers and (ii) commercial
        and industrial customers. Our connetion fee sales to residential customers
        and
        industrial customers represented 90% and 10% of our net sales for the fiscal
        year ended December 31, 2006, and 77% and 23% of our net sales for the fiscal
        year ended December 31, 2005, respectively. Sales to miscellaneous customers
        who
        are neither residential nor commercial and industrial customers accounted
        for
        the remainder of our sales.
 
 ***Residential
        Customers*** ****
 
 Natural
        gas is primarily used by residential owners for cooking as well as water
        and
        space heating. We market directly to property developers, government departments
        and organizations, private companies and state-owned enterprises, as these
        entities enter into master supply contracts with us for the connection of
        gas to
        all the units within a residential development (new or existing, owned by
        such
        entities or their respective employees). These entities are responsible for
        making, or they coordinate with the end users to facilitate our efforts in
        collecting the advance payment of, connection fees, while gas usage charges
        are
        paid by the individual end users. With new residential developments, connection
        fees are collected in advance by installment based on the ratio-of-completion
        of
        the pipeline construction work. We receive full payment of connection fees
        when
        construction is completed regardless of whether the units are sold or occupied.
        The actual supply of gas commences after the unit is occupied.
  17
  We
        also
        market to existing buildings without piped natural gas supplies. Representatives
        of the buildings will consult individual households as to whether they wish
        to
        have piped natural gas supply and coordinate the collection of connection
        fees
        from the end users on our behalf. Both connection fees and gas usage charges
        are
        payable in advance by the individual end users. We provide connection services
        and supply gas at market price after receiving payment. Pipelines and gas
        appliances are owned by the end users, with one-year quality guarantee by
        us. We
        maintain the pipelines outside the end user’s homes. The contracts are generally
        renewable on a yearly basis.
 
 At
        present, we have approximately 220 master supply agreements for the supply
        of
        gas to 63,000 end users in Beijing and Tian Jin Municipalities and Hebei,
        Jiangsu and Anhui Provinces. Our top five residential customers, who are
        developers or owners of residential areas, are Shanghai Datun Energy Holdings,
        Jinzhou Chengzhen Development Co., Xuzhou Ganglong Real Estate Development
        Co.,
        Kailun Weizhou Minerals Co., and Jinzhou Real Estate Co. The percentage of
        our
        connection fees for which each of them accounts is 36.43%,8.73%, 7.34%,7.2%
        and
        5.54%, respectively.
 
 ***Industrial
        and Commercial Customers*** ****
 
 Our
        industrial and commercial customers use natural gas primarily for heating,
        air
        conditioning, water heating and cooking purposes. These customers include
        owners
        of hotels, restaurants, office buildings, shopping centers, hospitals,
        educational establishments, sports and leisure facilities and exhibition
        halls.
        Natural gas has a wide variety of applications for industrial customers such
        as
        fuelling industrial boilers, furnaces, ovens, incinerators, foundries and
        steamers as well as water and space heating in staff canteens and dormitories
        within the industrial customers’ premises. We enter into supply contracts with
        these customers for the connection of gas to their premises, and both connection
        fees and gas usage charges are borne by such customers.
 
 The
        table
        below presents information about our industrial and commercial customers
        for the
        periods indicated:
  Percentage
                  of SalesFiscal
                  year ended December 31,Customers
              
              
              
              2006
              
              2005Hebei
                  Zhong Gang Steel
              
              
              
              %
              
              51.78
              %
              
              15.1
              %Pei
                  County Tian Ma Wu Ye
              
              
              
              
              
              0
              %
              
              10.6
              %Elite
                  (Lang Fang) Textile
              
              
              
              
              
              0.2
              %
              
              0.4
              %Tang
                  Shan Chang Sheng
              
              
              
              %
              
              9.04
              %
              
              1.0
              %Tang
                  Shang Heng Tong
              
              
              
              
              
              0
              %
              
              2.4
              %Total
              
              
              
              %
              
              61.02
              %
              
              29.5
              %
 
 Our
        agreement with Tang Shang Heng Tong expired in March 2006 and we finished
        this
        contract.
 
 During
        the fiscal year ended December 31, 2006, our largest two customers were Heibei
        Zhong Gang Steel and Tang Shan Chang Sheng. Our sales generated from Beijing
        Zhong Ran Xiang Ke were $334,326 for the fiscal year ended December 31,
        2006.
 
 **Pricing
        and Regulations**
 
 We
        determine connection fees based on a detailed analysis of factors such as
        estimated capital expenditure, number of users, expected penetration rates,
        income levels and affordability to local residents. We arrive at gas usage
        charges after taking into consideration the wholesale price of gas, operating
        costs, price of substitute products, internal business model margins and
        the
        purchasing power of local residents. Connection fees and gas usage fees are
        subject to the approval of the local state price bureau. Future price increases
        are also subject to the same approval process. In considering applications
        for
        an increase in gas usage charges, the local state price bureau may consider
        factors such as increases in the wholesale price of gas or operating expenses,
        inflation, additional capital expenditure, and whether the profit margin
        remains
        fair and reasonable.
  18
  ***Connection
        Fees***
 
 We
        charge
        residential customers a flat connection fee for connections to each type
        of gas
        appliance, typically cooking stoves, water heaters and boilers. The level
        of
        connection fees varies among operational locations and is approved by the
        relevant local state price bureau. The average of these connection fees for
        the
        company in 2006 was approximately $267 per household.
 
 For
        commercial and industrial customers, the connection fee is determined based
        on
        the facility capacity (on a cubic meter per day basis). Should additional
        capacity be needed, these customers are required to pay additional connection
        fees for the additional capacity installed. When entering into master supply
        contracts for mass connections, we usually require the payment of deposit
        from
        customers while the balance is payable in accordance with the terms set out
        in
        the contracts. In the event customers default in the payment of connection
        fees,
        we will not start the supply of natural gas until the connection fees are
        paid.
  The
        deposit received from customers upon the signing of supply contracts generally
        funds the majority of our capital costs in any new operational location.
 
 ***Gas
        Usage Charges*** ****
 
 Gas
        usage
        charges are based on actual usage on a per cubic meter basis. The gas usage
        charges per cubic meter  vary
        between operational locations and the payment mechanism between different
        categories of customers varies.
 
 Since
        our
        inception, the majority of our residential customers have purchased gas units
        in
        cash at our sales outlets with details of the prepaid gas units stored
        electronically on a debit card. The debit card is inserted into a debit card
        debit gas meter installed at the end user’s premises to activate the gas supply.
        Units of gas used are deducted from the debit card. When the level of prepaid
        gas units drops to a certain level (currently pre-set at three cubic meters),
        the gas meter will produce a sound signal to remind the customer to replenish
        the value stored in the debit card. Over 70% of our residential customers
        utilize the debit card payment method. This payment method provides significant
        advantages to us as all gas purchases are prepaid - not at the point of sale
        or
        in arrears.
 
 For
        those
        residential customers without a debit card gas meter installed and for
        commercial and industrial customers, payments for natural gas usage are made
        in
        arrears. Gas meters that record actual gas consumption are installed at the
        end
        users’ premises and meter readings are taken physically by US every month.
        Monthly bills based on the prior month’s actual usage are then sent to
        customers. In the event customers default in payment of gas usage charges,
        gas
        supply will be suspended within one month of billing.
 
 **Regulatory
        Framework for Natural Gas Distribution Companies**
 
 
 ***Pricing
        Regulations*** ****
 
 We
        purchase natural gas from natural gas wholesalers, which are state-owned
        enterprises and which must comply with PRC natural gas pricing regulations.
        The
        wholesale price of natural gas payable by distribution companies, such as
        Beijing Gas, to the suppliers of natural gas is comprised of three components,
        the wellhead price, the pipeline transportation tariff and the purification
        fee.
        The wellhead price is fixed by the PRC State Development Planning Commission,
        and is currently set at $.12 per cubic meter with a 10% allowance for upward
        or
        downward adjustments for negotiation between suppliers and distribution
        companies. The pipeline transmission tariffs are determined by reference
        to the
        investment costs of the relevant long distance pipeline, depreciation, wear
        and
        tear and the distance of delivery. The purification fee is based on the actual
        purification costs of the suppliers. Both the pipeline transmission tariffs
        and
        the purification fee must also be approved by the PRC State Development Planning
        Commission.
  19
  **Pricing
        of Natural Gas - US$ per cubic meter**
  **2002**
                  
                  **2003**
                  
                  **2004**
                  
                  **2005**
                  
                  **2006****Wellhead**
                  
                  **$**
                  **0.08**
                  
                  **$**
                  **0.09**
                  
                  **$**
                  **0.09**
                  
                  $
                  0.08
                  
                  **$**
                  **0.11****Pipeline**
                  
                  **$**
                  **0.09**
                  
                  **$**
                  **0.09**
                  
                  **$**
                  **0.09**
                  
                  $
                  0.09
                  
                  **$**
                  **0.09****Purification**
                  
                  **$**
                  **0.01**
                  
                  **$**
                  **0.01**
                  
                  **$**
                  **0.01**
                  
                  $
                  0.01
                  
                  **$**
                  **0.01****Total**
                  
                  **$**
                  **0.18**
                  
                  **$**
                  **0.19**
                  
                  **$**
                  **0.19**
                  
                  $
                  0.18
                  
                  **$**
                  **0.21**
  ***Operational
        and Construction Permits*** ****
 
 In
        the
        PRC, companies in the gas distribution business must also obtain an operational
        permit from the PRC Ministry of Construction to begin operation. In addition,
        a
        construction permit must be obtained if such gas distribution company also
        engages in construction. In both cases, the PRC Ministry of Construction
        will
        review the qualifications and experience of the management and technical
        staff
        of the distribution company and consider whether the distribution company
        is
        capable of fulfilling the operational and construction standards.
 
 As
        of the
        date of this annual report, Beijing Gas and all of our project companies
        and
        branch offices have the necessary operational permits.
 
 ***Safety
        Regulations***
 
 As
        a
        natural gas distributor, Beijing Gas is regulated by the relevant stipulations
        of Administrative Rules on the City Gas Safety jointly promulgated by the
        PRC
        Ministry of Construction, PRC Ministry of Labor and PRC Ministry of Public
        Security effective in May 1991.  According to such rules, the manufacture,
        storage, transportation, operation, usage of city gas, design and construction
        of gas-related projects, and the manufacture of gas-related facilities shall
        be
        subject to relevant safety requirements and qualifications.
 
 ***Income
        Taxes***
 Pursuant
        to the tax laws of PRC, general enterprises are subject to income tax at
        an
        effective rate of 33%. Beijing Gas is in the natural gas industry, whose
        development is encouraged by the government. However, PRC income tax regulations
        provide that any company operating in the natural gas industry enjoys a
        favorable tax rate. In addition, Beijing Gas has been approved as a high
        technology company and as such has been enjoying preferential income tax
        treatment under the PRC’s income tax policies. Under these policies, Beijing Gas
        was exempt from corporate income taxes for the first two years commencing
        from
        its first profitable year, and thereafter will be entitled to a 50% tax
        reduction for the succeeding three years. Our first profitable tax year was
        2003. Accordingly, our income is subject to a reduced tax rate of 7.5% from
        2005
        to 2007. Beginning in 2008, our income tax rate will be 9%. The subsidiaries
        of
        Beijing Gas are subject to the effective rate of 33%, but almost all income
        is
        earned by Beijing Gas.
 
 
 **Safety
        and Quality Control**
 
 ***Safety
        Control***
 
 We
        are
        focused on safety, have implemented a safety system and set up a safety
        department to oversee safety issues for all of our operations. We carry out
        routine inspection of the branch pipelines, customers’ pipelines, gas meters and
        gas appliances at the customers’ premises twice annually. These semi-annual
        inspections are free unless major repairs are required in which case we charge
        the customers for labor, replacement parts and other materials used for the
        repairs.
 
 We
        believe in educating users about safety procedures. Before gas is actually
        supplied, we provide a thorough explanation of safety procedures to end users,
        hold regular seminars, and distribute brochures and booklets on safety. We
        have
        a 24-hour telephone help line for enquiries and reporting of emergency matters.
 
 20
 In
        order
        for us to monitor the operations of the pipelines for abnormal gas usage,
        gas
        leakages, or any other irregularities, we collect information about the
        temperature, pressure and volume of gas from key points along the main
        pipelines. The information is collated in the control center located in the
        head
        office of each operational location for analysis. We use process control
        instruments known as Supervisory Control and Data Acquisition systems, in
        which
        a number of small detectors are installed along the pipelines to collect
        information and process the data electronically in real time at the control
        center. Each project company conducts a major inspection of its pipelines,
        processing station(s) and other equipment at least once annually. If gas
        leakages or any other irregularities are detected, we will take remedial
        action
        immediately.
  Due
        to
        the strict implementation of safety control procedures, there have been no
        major
        accidents which have resulted in serious injury or death since our
        inception.
 
 ***Quality
        Control***
 
 Quality
        control begins in the design and construction phase of the natural gas supply
        infrastructure. Our quality control team regularly makes inspection visits
        and
        conducts tests to ensure that the construction work meets our required standards
        as well as national and local regulations.
 
 We
        also
        have strict quality control procedures for the sourcing of raw materials.
        We
        only purchase from our approved list of qualified suppliers and such suppliers
        have fulfilled the relevant requirements in accordance with national standards.
 
 In
        order
        to monitor the quality of gas purchased by us, we obtain gas composition
        reports
        regularly from our gas suppliers with data on important measures such as
        the
        heat content and composition of impurities in our gas supply. We also conduct
        regular tests on the gas purchased in order to verify its quality.
 
 **Research
        and Development**
 
 We
        have
        eight full-time employees engaged in the company-sponsored research and
        development efforts. These employees specialize in the fields of energy,
        mechanical and electronic engineering. For the fiscal year ended December
        31,
        2006 and 2005, $543,500 and $545,350, respectively, on R&D activities. Areas
        that are targets of our ongoing research and development activities
        include:
 
 ·
              Methodology
                  and practices to increase operating efficiency and safety
                  standards.
 
 ·
              Expansion
                  of the applications for natural gas, such as gas-fuelled air conditioners,
                  washing machines and dryers, and the use of CNG in motor
                  vehicles.
  ·
              Improvements
                  in gas storage and transportation
                  systems.
 
 Our
        research and development department stays abreast of natural gas-related
        developments domestically and internationally by regularly attending domestic
        and international natural gas conferences that include exchange programs
        with
        international natural gas companies.
 
 **Competition**
 
 Since
        our
        inception, we have focused on supplying natural gas to small cities in the
        PRC
        where the average population is 250,000 and below, where the natural gas
        penetration rate is typically 0%, and where we are able to obtain exclusivity
        for natural gas distribution from the local government. In entering into
        these
        small cities, we are generally authorized to be the sole supplier of natural
        gas
        by the local governments pursuant to franchise agreements for a typical term
        of
        25 to 30 years. This differs from the bigger natural gas distribution companies
        which have focused on a few areas with large populations. The larger cities
        are
        very competitive markets that tend to offer less flexibility for advantageous
        pricing arrangements. For a typical small city project, our initial investment
        is only about $500,000 with an average internal rate of return of 31% over
        the
        life of the project. Due to its small city focus where the operating cost
        is low
        and competition is much less intense, we believe we generate profit margins
        and
        returns at or above industry-average levels.
  21
  As
        we
        compete principally with small- to medium- sized private companies in the
        natural gas distribution industry, the information about our competition
        and
        competitive position is limited. Based on the information available to us,
        we
        estimate that there are approximately 200 hundred small- to medium- sized
        private gas distribution companies in the PRC. Most of these companies target
        local towns, rather than take the approach that we do, of targeting cities
        in
        different provinces. Also, most of these companies operate an average of
        three
        or four natural gas distributions systems, as compared to the 20 natural
        gas
        distribution systems that we operate.
 
 Based
        on
        the division of the administrative districts in the PRC as of December 31,
        2005,
        it has been estimated that there are approximately 2,862 small cities in
        the PRC
        with a population between 100,000 to 300,000. Among them, approximately 800
        small cities have the potential to be supplied with natural gas and 100 small
        cities have already been supplied with natural gas. Among the 100 small cities
        where natural gas is already available, Beijing Gas is the distributor to
        23 of
        them, and, therefore, we believe we have the largest market share among our
        peer
        businesses that target the natural gas market among small cities. Another
        favorable contrast between our peer businesses and us is that, many other
        gas
        distribution companies do not secure long-term stable supply contracts with
        natural gas suppliers and have few industrial customers, while we do secure
        long-term stable supply contracts and have many industrial
        customers.
 
 There
        are
        five gas distribution companies in China listed on the Hong Kong Stock Exchange:
        Xinao Gas Holdings Limited, China Gas Holdings Limited, Panva Gas Holdings
        Limited, Zhengzhou Gas Company Ltd., and Chinese People Gas Holdings Company
        Limited. **** These
        companies focus more on supplying natural gas in bigger metropolitan areas,
        and
        therefore do not compete with us directly. However, Beijing Gas operates
        very
        similarly to some of these publicly listed PRC gas companies (with the exception
        of Zhengzhou Gas Company Ltd. and Panva Gas Holdings Ltd.) where significant
        revenue and profit are generated from the construction of local gas pipeline
        and
        connection of the pipeline to end users. This is primarily due to the PRC’s
        extremely low natural gas penetration rate (below 3% on a national basis).
        Therefore, PRC gas companies behave very differently from traditional gas
        utilities elsewhere and exhibit financial characteristics such as high growth
        rate, high profit margin and relatively longer receivable collection periods
        due
        to the construction cycle. We plan to compete with some of these companies
        in
        the future as our operations grow.
 
 **Intellectual
        Property**
 
 We
        do not
        hold -any registered trademarks or patents. **** *Please
        refer to “We may be exposed to intellectual property infringement and other
        claims by third parties, which, if successful, could cause us to pay significant
        damage awards and incur other costs,” in the section titled “Risk
        Factors” in our registration statement filed with the SEC on October 27,
        2006 for risks related to the technology we use.*
 
 We
        own
        and operate a website under the internet domain name www.sino-gas.com. The
        information contained in our websites is not incorporated by reference to
        this
        annual report or the registration statement of which this annual report forms
        a
        part.
 
 **Insurance**
 
 We
        currently do not carry any product liability or other similar insurance,
        nor do
        we have property insurance covering our plants, manufacturing equipment and
        office buildings. While product liability lawsuits in the PRC are rare and
        Beijing Gas has never experienced significant failures or accidents, there
        can
        be no assurance that Beijing Gas would not face liability in the event of
        any
        failure or accident. We plan to purchase property insurance to cover our
        manufacturing plants, equipment and office buildings in the near future.
  Beijing
        Gas and its subsidiaries maintain social insurance for their staff and employees
        in accordance with relevant requirements under PRC law and have compulsory
        insurance and fixed-sum insurance for cars and other vehicles.
 
 **Employees**
  As
        of
        March 7, 2007, we had approximately 246 full-time employees, including
        approximately 50 technicians, six management personnel, 32 department and
        branch
        managers, 30 engineers and 15 research and development personnel.
 
 **Government
        Regulation**
  22
  The
        pricing of natural gas in China is subject to central and local government
        regulation or approval. The wholesale price of natural gas payable by
        distribution companies, such as Beijing Gas, to suppliers of natural gas
        in the
        PRC is comprised of three components: the wellhead price, the pipeline
        transportation tariff, and the purification fee. The wellhead price is fixed
        by
        the PRC State Development Planning Commission (“SDPC”). Both the pipeline
        transmission tariffs and the purification fee must also be approved by SDPC.
        *Please refer to “Regulatory Framework for Natural Gas Distribution
        Companies” in the section titled “Description of Business” of this**annual report**for a more detailed
        discussion.*
 
 Under
        certain regulations in the form of public notices issued by the PRC State
        Administration of Foreign Exchange, or SAFE, our shareholders who are PRC
        resident entities or individuals are subject to certain registration
        requirements due to the status of GAS (BVI) and Sino Gas under Chinese law
        as
        offshore special purpose companies, or SPCs. These regulations would prohibit
        Beijing Gas from distributing dividends or profits to GAS (BVI) and/or Sino
        Gas
        as SPCs unless we comply with the registration requirements set forth by
        SAFE.
        As of the date hereof, Mr. Liu Yu Chuan, our President, Chief Executive Officer
        and Chairman of the Board, has completed the registration with the SAFE and
        has
        been issued a SAFE certificate in August 2006. We are in the process of
        determining whether there are additional shareholders who are subject to
        the
        SAFE regulations and whose compliance status will have a material effect
        on
        our ability to remit any of our profits out of the PRC as dividends or
        otherwise.*Please refer to “Recent PRC State Administration of Foreign
        Exchange (“SAFE”) Regulations regarding offshore financing activities by PRC
        residents, have undertaken continuous changes which may increase the
        administrative burden we face and create regulatory uncertainties that could
        adversely affect the implementation of our acquisition strategy, and a failure
        by our shareholders who are PRC residents to make any required applications
        and
        filings pursuant to such regulations may prevent us from being able to
        distribute profits and could expose us and our PRC resident shareholders
        to
        liability under PRC law” under “Risks Related to Doing Business in the PRC” in
        the section titled “Risk Factors” of this**annual report**for
        information regarding the risks related to the SAFE regulations that we are
        subject to.*
 
 We
        are
        subject to PRC regulations that require a company that is in the gas
        distribution business to obtain an operation permit, and a construction permit
        if such company also engages in construction, from the PRC Ministry of
        Construction to begin operation and/or construction, as the case may be.
        Fuel
        service station standards are subject to regulation by the PRC’s Ministry of
        Construction, General Administration of Quality Supervision, and Bureau of
        Inspection and Quarantine. Required certificates are issued upon satisfactory
        inspection of service stations. In addition, there are various standards
        that
        must be met for filling stations, including handling and storage of gas,
        tanker
        handling, and compressor operation. These standards are regulated by local
        construction and gas operations regulating authorities. Inspections are carried
        out and certificates for the handling of dangerous agents are issued by relevant
        local authorities.
 
 Other
        than the foregoing, Beijing Gas is not subject to any significant government
        regulation of its business or production, or any other government permits
        or
        approval requirements, except for the laws and regulations of general
        applicability for corporations formed under the laws of the PRC.
 
  ***Item
        2.***  ***Description
        of Property***
 
 We
        have
        offices at all operational locations. The facilities are added with each
        new
        project or operational location as part of the execution of the
        project.
 
 Under
        PRC
        law, most land is owned by the government, which sells "land use rights"
        to
        individuals or entities. A “land use right” allows the holder the right to use
        the land for a specified long-term period of time and confers to the holder
        all
        the incidents of ownership of the land during that period. Beijing Gas and
        its
        subsidiaries hold land use rights for two parcels of land registered under
        their
        names, and lease land use rights from third parties for additional parcels
        of
        land that are used for its gas distribution projects. In addition, Beijing
        Gas
        leases office buildings and warehouse facilities for its business operations.
 
 23
 Set
        forth
        below is the detailed information regarding these land use rights registered
        under the names of Beijing Gas or its subsidiaries:
 
 Registered
                  owner of land use right
              
              Location
                  & certificate of land use right
              
              Usage
              
              (approximate)
                  square meters
              
              Date
                  of Issuance or Grant
              
              Expiration
                  DateBeijing
                  Gas
              
              South
                  side of Huang He Road, Cai Yuan Town, Wu Qiao County
                
                Wu
                  Guo Yong (2003) Zi Di Chu No. 208
              
              Other
                  commercial use
              
              1,520
              
              November
                  25, 2003
              
              November
                  25, 2043Y
                  Yu Tian Country Zhong Ran Wei Ye Gas Ltd.
              
              Between
                  East side of Yu Zun West Road and South side of Guan Qu, Yu Tian
                  County
                
                Yu
                  Tian Guo Yong (2004) Zi Di No. 097
              
              Industrial
                  use
              
              2,674.5
              
              June
                  8, 2004
              
              May
                  21, 2054
  In
        addition to the land use rights described above, we have the right to use
        an
        aggregate of approximately 36,283 square meters for our operations either
        through grants or transfers of land use rights or lease arrangements. The
        rights
        range in duration from six to 20 years.
  As
        of the
        date of this annual report, Beijing Gas owns 700 km of high-pressure underground
        pipeline all with a diameter greater than 110 millimeters. Beijing Gas owns
        and
        operates 23 natural gas stations with accompanying buildings, gas compression
        facilities and other equipment. We own 17 cars, 13 trucks and 25 containers.
        We
        also lease trucks from PetroChina Company Limited.
 
 
 **Item
        3.**  **Legal
        Proceedings**
 
 To
        our
        knowledge, there is no material litigation pending or threatened against
        us.
*Please refer to “We may be exposed to intellectual property infringement and
        other claims by third parties, which, if successful, could cause us to pay
        significant damage awards and incur other costs” in the section titled “Risk
        Factors” in our registreation statement filed with the SEC on October 27,
        2006**for information regarding risks related to the technology we
        use.*
  
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders**
  On
          September 16, 2006 the majority shareholders of the Company resolved to
          approve
          and authorize the following actions:
  · to
          change
          the name of the Company from Dolce Ventures, Inc. to Sino Gas International
          Holdings, Inc. (the “Name Change”).
 
 · to
          authorize the Board of Directors to effect a three hundred four and forty-four
          one-hundredths-for-one (304.44:1) reverse stock split of the outstanding
          shares
          of Common Stock (the "Reverse Split", and together with the Name Change,
          the
“Corporate Actions”).
 
 The
          Corporate Actions did not become effective until the filing with, and acceptance
          by, the Office of the Secretary of State of Utah of an Amendment to the
          Company’s Articles of Incorporation (the “Amendment”) at least 20 days after the
          date of the mailing of this Information Statement to the Company’s shareholders.
          The Corporate Actions became effective November 17, 2006.
 On
        October 16, 2006, the holder of the majority of our series B convertible
        preferred shares, Vision Opportunity Master Fund, Ltd., authorized, by written
        consent, the designation of some of the Company’s preferred stock as series B-1
        convertible preferred shares.
 
 
 **PART
        II**
 
 **Item
        5.**  **Market
        for Common Equity and Related Stockholder Matters**
 
 Our
        common stock is currently quoted under the symbol "SGAS" on the National
        Association of Securities Dealers’ over-the-counter Bulletin Board. There is a
        limited trading market for our common stock. During the fourth quarter of
        2006,
        the bid price for our common stock ranged from a high of $6.00 to a low of
        $3.50, and in 2007, through March 26, the bid price for our common stock
        ranged
        from $4.99 to $5.00, according to the Web site www.otcbb.com. There has
        been no participation of a broker or dealer in the trading of our common
        stock.
 
 As
        of
        March 23, 2007, there were 658 holders of record of our common
        stock.
 
 Over
        the
        past two years, we have not declared any cash dividend on our common shares,
        and
        we have no plan to issue a cash dividend in the future.
  The
          following table sets forth for the respective periods indicated the prices
          of
          the common stock in the over-the-counter market, as reported and summarized
          by
          the OTC Bulletin Board. Such prices are based on inter-dealer bid and asked
          prices, without markup, markdown, commissions, or adjustments and may not
          represent actual transactions.
 
 CALENDAR
                    QUARTER ENDED
                
                HIGH
                    BID(S)
                
                LOW
                    BID(S)March
                    31, 2005
                
                $
                0.02
                
                $
                0.005June
                    30, 2005
                
                $
                0.10
                
                $
                0.005September
                    30, 2005
                
                $
                0.10
                
                $
                0.005December
                    31, 2005
                
                $
                0.10
                
                $
                0.005March
                    31, 2006
                
                $
                0.03
                
                $
                0.0061June
                    30, 2006
                
                $
                0.01
                
                $
                0.0075September
                    30, 2006
                
                $
                0.04
                
                $
                0.014December
                    31, 2006
                
                $
                5.00
                
                $
                3.60
 
 24
 **Penny
        Stock Regulations**
 
 The
        SEC
        has adopted regulations which generally define "penny stock" to be an equity
        security that has a market price of less than $5.00 per share. Our common
        stock
        falls within the definition of penny stock and is subject to rules that impose
        additional sales practice requirements on broker-dealers who sell such
        securities to persons other than established customers and accredited investors
        (generally those with assets in excess of $1,000,000, or annual incomes
        exceeding $200,000 or $300,000, together with their spouse).
 
 For
        transactions covered by these rules, the broker-dealer must make a special
        suitability determination for the purchase of such securities and have received
        the purchaser's prior written consent to the transaction. Additionally, for
        any
        transaction involving a penny stock, other than an exempt transaction, the
        rules
        require the delivery, prior to the transaction, of a risk disclosure document
        mandated by the SEC relating to the penny stock market. The broker-dealer
        also
        must disclose the commissions payable to both the broker-dealer and the
        registered representative, current quotations for the securities and, if
        the
        broker-dealer is the sole market-maker, the broker-dealer must disclose this
        fact and the broker-dealer's presumed control over the market. Finally, monthly
        statements must be sent disclosing recent price information for the penny
        stock
        held in the account and information on the limited market in penny stocks.
        Consequently, the "penny stock" rules may restrict the ability of broker-dealers
        to sell our common stock and may affect the ability of investors to sell
        their
        common stock in the secondary market.
  **Dividends**
 
 Our
        board
        of directors has not declared a dividend on our common stock during the last
        two
        fiscal years or the subsequent interim period and we do not anticipate the
        payment of dividends in the near future, as we intend to reinvest our profits
        to
        grow operations. We rely on dividends from Beijing Gas for our funds and
        PRC
        regulations may limit the amount of funds distributed to us from Beijing
        Gas,
        which will affect our ability to declare any dividends. *Please
        refer to “Risk Factors - Risks Related to Doing Business in the PRC” and “Risk
        Factors - Risks Related to an Investment in our Common Stock - Beijing Gas
        is
        subject to restrictions on paying dividends and making other payments to
        us”,
“We are not likely to pay cash dividends in the foreseeable future” and
“Governmental control of currency conversion may affect the value of your
        investment” in the section titled “Risk Factors” in our registration statement
        filed with the SEC on October 27, 2006. Also see the section titled "Description
        of Securities” of this annual report.*
 
 **Securities
        authorized for issuance under equity compensation plans**
  **Plan
                    category**
                **Number
                    of securities to be issued upon exercise of outstanding options,
                    warrants
                    and rights**
                  
                  **(a)**
                **Weighted-average
                    exercise price of outstanding options, warrants and
                    rights**
                  
                  **(b)**
                **Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securities reflected in column
                    (a))**
                  
                  **(c)****Equity;
                    compensation plans approved by security holders**
                **--**
                **--**
                **--****Equity
                    compensation plans not approved by security
                    holders**
                **400,000**
                **$3.00**
                **1,460,000****Total**
                **400,000**
                **$3.00**
                **1,460,000**
   25
  Item
        6.  **Management’s
        Discussion and Analysis or Plan of Operation**
  The
        following discussion and analysis of our consolidated financial condition
        and
        results of operations should be read in conjunction with the consolidated
        financial statements and related notes of Beijing Gas appearing elsewhere
        in
        this annual report. This discussion and analysis contains forward-looking
        statements that involve risks, uncertainties and assumptions. Actual results
        may
        differ materially from those anticipated in these forward-looking statements
        as
        a result of certain factors, including, but not limited to, those set forth
        under "Risk Factors" in our registration statement filed with the SEC on
        October
        27, 2006.
 
 **Overview**
 
 We
        are
        engaged in the development of natural gas distribution systems in small-
        and
        medium-sized cities in China, as well as the distribution of natural gas
        to
        residential, commercial and industrial customers in China, through our
        indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.
        We
        also have a subsidiary, Pegasus Tel, Inc. which owns and operates payphones.
        We
        plan to spin off our payphone operation by making a dividend of the Pegasus
        Tel,
        Inc. shares to our shareholders of record as of August 30, 2006. Because
        the
        operations of Pegasus Tel, Inc. are negligible, the discussion and analysis
        in
        this section is focused on our natural gas business operated by Beijing Gas
        and
        its subsidiaries in China. *Please refer to**the section titled
“Organization and Business of the Company”**of this annual report for
        more details regarding the reverse merger transactions and our corporate
        structure and history.*
 
 Beijing
        Gas is organized as a holding company with 18 subsidiaries, known as project
        companies, in four provinces, and four branches offices in Beijing, as shown
        on
        the corporate structure chart provided below. The project companies are the
        operating subsidiaries of Beijing Gas. Each project company operates as a
        local
        natural gas distributor in a city or county, known as an operational location,
        under an exclusive franchise agreement between Beijing Gas and the local
        government or entities in charge of gas utility, pursuant to which Beijing
        Gas
        formed the project company to operate the natural gas distribution project
        in
        the operational location.
 
 In
        addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
        Ke
        Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
        venture entity engaged in the business of development, licensing and sale
        of oil
        and gas technologies and equipment, and sale of self-produced
        products.
 
 Beijing
        Gas owns and operates natural gas distribution systems primarily in Hebei,
        Jiangsu, Shandong and Anhui provinces in the PRC.
 
 Through
        its subsidiaries, Beijing Gas is a natural gas services operator, principally
        engaging in the investment, operation and management of city gas pipeline
        infrastructure, in the distribution of natural gas to residential an industrial
        users, in the construction and operation of oil stations and natural gas
        stations, and in the development and application of oil and natural gas related
        technologies. Beijing Gas and it subsidiaries own and operate 23 natural
        gas
        distribution systems serving approximately 63,000 residential and four
        commercial or industrial customers. Our facilities include approximately
        700 km
        of pipeline and delivery networks with a designed daily capacity of
        approximately 70,000 cubic meters of gas. Currently, we are constructing
        an
        additional four natural gas distribution systems. We own and operate natural
        gas
        distribution systems primarily in Hebei, Jiangsu, Shandong and Anhui provinces.
 
 Below
        is
        our corporate structure:
 
 26
 
 
 (1) *See
        “Organizational History of Gas (BVI) and Beijing Gas under “Organization and
        Business of the Company” of this annual report regarding the subsidiaries of
        Beijing Gas.*
 
 **RESULTS
        OF OPERATIONS**
 
 **Fiscal
        years ended December 31, 2006 and 2005**
 
 In
        the
        fiscal year ended December 31, 2006, our primary measures of financial health
        remained flat or decreased. As shown in the table below, our net sales remained
        approximately flat, due primarily to a decrease in connection fees from the
        previous year, although partly offset by a substantial increase in gas sales.
        Gross profit and gross margin decreased slightly, and operating income and
        net
        income decreased somewhat more significantly.
 
 For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              US$%Net
                  Sales
              
              
              10,870,718
              
              
              10,907,289
              
              
              -0.34
              %Gross
                  Profit
              
              
              6,481,576
              
              
              6,811,938
              
              
              -4.85
              %Operating
                  Income
              
              
              5,162,260
              
              
              5,800,949
              
              
              -11.01
              %Net
                  Income
              
              
              5,165,757
              
              
              5,702,433
              
              
              -9.41
              %Gross
                  Margin
              
              
              59.62
              %
              
              62.45
              %
              
              -2.83
              %Net
                  Margin
              
              
              47.52
              %
              
              52.28
              %
              
              -4.76
              %
 
 Due
        to
        the capital-intensive nature of our industry, the expansion rate of our business
        is closely related to capital availability. We received capital inflows from
        equity financing in September and November of 2006. We believe that these
        inflows occurred too close to the end of 2006 to have a substantial effect
        on
        our financial performance for that year. However, we expect that they will
        have
        a positive effect on our financial performance in 2007.
 
 As
        described below, we have reason to believe that the decrease in our income
        in
        2006 was only temporary and does not provide a reason to change our business
        strategies. With respect to the overall business in 2007, we expect to grow
        our
        business through active expansion into new cities and further penetration
        of
        existing markets. We are considering several potential acquisition targets,
        which would substantially contribute to our sales and net income if successfully
        acquired.
 
 27
 We
        plan
        continue to pursue the following strategies in 2006:
 
 (i)
        Focus
        on small- to mid-sized cities each with a population of no more than one
        million, where there is little competition to obtain a franchise, and where
        our
        franchise grants us exclusivity. We are a leading player in the small-to-mid
        sized city market. In the meantime, we do not exclude the possibility of
        expanding into big cities, so long as that we can gain competitive advantages
        through our expertise in the industry.
 
 (ii)
        Secure contracts for long-term supplies of natural gas from major gas suppliers
        in China at favorable prices and on favorable terms, which would support
        the
        continuous expansion of our customer base. Our current long-term gas supply
        contracts have given us a significant advantage in gaining new markets and
        building a reputation for guaranteed gas supply.
 
 (iii)
        Finance our operations using a well-designed financing plan that will give
        us a
        favorable cost of capital. The successful listing of our common stock on
        the
        National Association of Securities Dealers’ Over the Counter Bulletin Board has
        provided us with access to the international capital markets, a financing
        advantage that most of our competitors don’t have. As we are in a very
        capital-intensive business, our income will depend on our ability to issue
        financial instruments in a timely manner.
 
 (iv)
        Employ the best management with rich experience in the industry and improve
        operating efficiency and corporate governance. People factor is one of our
        core
        competitive advantages.
 
 
 **Net
        Sales**
 
 Net
        Sales, which consist of connection fees and gas sales, were $10.87 million
        for
        the year ended December 31, 2006, as compared to $10.91 million for the year
        ended December 31, 2005, representing a decrease of $40,000, or 0.37%. The
        slight decrease was primarily the result of a decrease in connection fees,
        which
        was largely offset by an increase in sales of natural gas. Connection fees
        declined nearly $1 million, or 12.6%, from $8.21 million in 2005 to $7.22
        million in 2006. Connection fees as a percentage of total net sales fell
        12%,
        from 75% in fiscal 2005 to 66% in fiscal 2006.
 
 (In
                  $ million)
              
              For
                  the 12 months ended December 312006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Net
                  Sales
              
              
              10.87
              
              
              100
              %
              
              10.91
              
              
              100
              %
              
              -0.37
              %Connection
                  Fees
              
              
              7.22
              
              
              66
              %
              
              8.21
              
              
              75
              %
              
              -12.06
              %Gas
                  Sales
              
              
              3.65
              
              
              34
              %
              
              2.70
              
              
              25
              %
              
              35.19
              %
 
 *Connection
        Fees*
 
 The
        decrease in connection fees is mainly due to our inability to take advantage
        of
        several business opportunities because of delay and reduction in size of
        our
        planned private financing transactions. Connection fees are generated in
        the
        early stages of development of a particular project location, and can be
        generated only after significant investment in distribution infrastructure,
        including pipelines and gas stations. Our business plan for 2006 included
        raising approximately $12.6 million in financing from the capital markets
        by
        mid-year to finance our investments in two industrial projects and expansion
        into one middle-sized city and three small-sized cities, which would have
        enabled us to record increased connection fees..
 
 The
        financing we did obtain in 2006 occurred later and provided a smaller amount
        of
        funds than we had intended. We received financing in two transactions completed
        on September 7 and October 20, 2006, The total net proceeds from these two
        transactions were $7.43 million, little more than half of the proceeds intended.
        The result of the reduced amount and later date of the financings was that
        we
        missed some of the opportunities we had originally targeted. Specifically,
        we
        were able to invest in only one of the two targeted industrial projects,
        and we
        were not able to expand into the targeted middle-sized city.
 
 28
 Had
        we
        been able to invest in the second industrial project as planned, our revenues
        would have increased by approximately $400,000. Expanding into the middle-sized
        city would have added approximately 4,000 residential household users to
        our
        customer base andcontributed approximately$1 million to our net sales in
        2006.
        We therefore would have had recognized approximately $1.4 million in additional
        net sales if our financing had occurred as planned and on schedule.
 
 
 (in
                  US$ millions)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Connection
                  Fees
              
              
              7.22
              
              
              100
              %
              
              8.21
              
              
              100
              %
              
              -12.06
              %Residential
                  Users
              
              
              6.53
              
              
              90
              %
              
              6.31
              
              
              77
              %
              
              3.49
              %Industrial
                  Users
              
              
              0.69
              
              
              10
              %
              
              1.9
              
              
              23
              %
              
              -63.68
              %
 
 With
        regard to the source of connection fees, $6.53 million, or 90% of total
        connection fees, came from the development of new residential users in 2006,
        an
        increase of 3.49% from prior one-year period. We connected 24.5 thousand
        residential users in 2006, an increase of approximately 3,000 users from
        2005.
 
 Industrial
        users contributed a relatively small $0.69 million, or 10%, to our total
        connection fees in 2006, compared with $1.9 million, or 23% of total connection
        fees, in 2005. The main reason is that we developed only one new industrial
        project due to the delay of financing.
 
 Our
        top
        five residential customers, who are developers or owners of residential areas,
        are Shanghai Datun Energy Holdings, Jinzhou Chengzhen Development Co., Xuzhou
        Ganglong Real Estate Development Co, Kailun Weizhou Minerals Co., and Jinzhou
        Real Estate Co.
 
 The
        table
        below is a breakdown of our top five residential customers by connection
        fees:
 
 **Residential
                  Customers**
              
              **Connected
                  Household Users (thousand)**
              
              **Connection
                  Fees:**
                **($
                  million)**
              
              **Percentage
                  of Connection Fees (%)**Shanghai
                  Datun Energy Holdings
              
              
              12
              
              
              2.63
              
              
              36.43
              %Jinzhou
                  Chengzhen Development Co.
              
              
              0.25
              
              
              0.63
              
              
              8.73
              %Xuzhou
                  Ganglong Real Estate Development Co
              
              
              0.2
              
              
              0.53
              
              
              7.34
              %Kailun
                  Weizhou Minerals Co.
              
              
              0.16
              
              
              0.52
              
              
              7.20
              %Jinzhou
                  Real Estate Co.
              
              
              0.16
              
              
              0.4
              
              
              5.54
              %
 
 As
        the
        table shows, Shanghai Datun Energy Holdings alone contributed nearly 40%
        of our
        total connection fees. Given the size of this residential project, we expect
        it
        to generate 6,000 newly-connected household customers in 2007..
 
 We
        had
        one new industrial customer in 2006, Qingxian North China Petroleum Machineries
        Co. (“Qingxian”), which generated $0.69 million in connection fees in
        2006
 
 *Gas
        Sales*
 
 Gas
        Sales
        accounted for 34% of total sales in 2006, nearly 10% higher than in 2005,
        due to
        Heibei Zhonggang steel company beginning to use gas in 2006.
 
 29
 No
        gas
        sales were generated from Qingxian in 2006. Beginning on March 8, 2007, however,
        that customer has been using approximately 15,000 to 20,000 cubic meters
        of
        natural gas per day, placing it among our largest customers for gas sales
        as of
        the date of this annual report.
 
 In
        terms
        of volume, we sold 11.84 million cubic meters of natural gas in 2006, compared
        with 9.85 million cubic meters in 2005. In terms of value, gas sales in 2006
        were $3.65 million, an increase of $0.95 million, or 35%, from 2005. The
        increase of gas sales in both volume and value can be mainly attributed to
        our
        increased gas sales to Hebei Zhonggang Steel Co., Ltd., one of our existing
        industrial customers.
 
 The
        table
        below is a breakdown of our major industrial customers for gas consumption
        in
        2006:
 
 **Industrial
                  Customers**
              
              **Gas
                  Usage (cubic meters)**
              
              **Gas
                  Usage**
                **($
                  million)**
              
              **Percentage
                  of Gas Sales (%)**Hebei
                  Zhong Gang Co.
              
              
              5,243,079
              
              
              1.67
              
              
              45.75
              %Hebei
                  Tangshan Cangsheng Ceramics Co.
              
              
              990,314
              
              
              0.29
              
              
              7.95
              %
 
 
 Gas
        usage
        by Hebei Zhong Gang accounted for almost half of our total gas sales in 2006.
        Throughout 2006, daily gas consumption by Hebei Zhongguang was roughly 15,000
        cubic meters, and daily gas consumption by Hebei Tangshan Cangsheng Ceramics
        Co.
        was nearly 2,000 cubic meters. In 2007, daily gas consumption by Hebei
        Zhongguang has increased to roughly 20,000 to 30,000.
  In
        addition to these two industrial projects, we anticipate that in 2007,
        natural gas consumption by Qingxian may reach approximately 20,000 cubic
        meters per day, as Qingxian’s operation goes into full swing, further increasing
        our gas sales.
 Gas
        sales
        to residential users increased 14.86%, from $0.74 million in 2005 to $0.85
        million in 2006. Gas sales to industrial users increased 538.71%, from $0.31
        million in 2005 to $1.98 million in 2006. Gas sales of $1.89 million were
        contributed by a single industrial project, Hebei Zhong Gang, which started
        to
        use gas at the beginning of 2006. Other gas sales, primarily sales to our
        affiliates, decreased 50% in 2006, as we intentionally reduced gas sales
        to
        affiliates, where the profit margin is approximately 2%, much lower than
        the
        approximately 15% profit margin for sales to industrial and residential users.
 
 
 ($
                  million)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Gas
                  Sales
              
              
              3.65
              
              
              100
              %
              
              2.7
              
              
              100
              %
              
              35.19
              %Residential
                  Users
              
              
              0.85
              
              
              23
              %
              
              0.74
              
              
              27
              %
              
              14.86
              %Industrial
                  Users
              
              
              1.98
              
              
              54
              %
              
              0.31
              
              
              11
              %
              
              538.71
              %Others
              
              
              0.82
              
              
              22
              %
              
              1.65
              
              
              61
              %
              
              -50.30
              %
  
 **Cost
        of sales**
 
 Cost
        of
        sales in fiscal 2006 was $ 4.39 million, an increase of $ 0.29 million, or
        7%,
        from $4.1 million in fiscal 2005.
 
 ($
                  million)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Cost
                  of Sales
              
              
              4.39
              
              
              100
              %
              
              4.1
              
              
              100
              %
              
              7.07
              %Connection
                  Cost
              
              
              1.55
              
              
              35
              %
              
              1.57
              
              
              38
              %
              
              -1.27
              %Gas
                  Cost
              
              
              2.84
              
              
              65
              %
              
              2.53
              
              
              62
              %
              
              12.25
              %
  30
 
 Our
        cost
        of sales has two components, cost of connections and cost of gas sales. Cost
        of
        connections fell 1.3% to $1.55 million in 2006, as compared with $1.57 million
        in 2005. Connection cost fell by a smaller percentage than connection revenues,
        which fell by 12% in the same period, mainly because we developed a greater
        proportion of residential users in 2006, and the gross margin for residential
        users is greater than that for industrial users.
 
 Cost
        of
        gas sales increased to $2.84 million in 2006 from $2.53 million in 2005,
        an
        increase of 12.25%. Given the 35% increase in gas sales, the cost of gas
        per
        cubic meter decreased significantly. This decrease is due primarily to our
        improved control over transportation costs and gas leakage during in 2006.
 
 We
        continued to purchase natural gas from wholesalers in 2006. One of our key
        competitive advantages is that we have a long-term gas supply contract with
        a
        major gas supplier in China. In 2006, our biggest gas supplier was PetroChina’s
        North China Oilfield Fourth Plant, with which we have signed long term gas
        supply agreement. The purchase price for natural gas from this plant is $0.21
        per cubic meters as of the end of 2006. We expect the price will remain
        unchanged in the short term
  The
        table
        below details our major gas suppliers in 2006 and 2005:
 Supplier
                
                2006
                
                2005North
                    China Oilfield, PetroChina
                
                $
                1,910,645.87
                
                $
                1,409,677.47Hebei
                    Natural Gas Co. Ltd
                
                $
                115,593.50
                
                $
                170,945.79
 
 **Gross
        Income**
 
 Gross
        income decreased slightly, from $6.81 million in 2005 to $6.48 million for
        2006.
 
 ($million)
              
              For
                  the 12 months ended December 312006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Gross
                  Income
              
              
              6.48
              
              
              100
              %
              
              6.81
              
              
              100
              %
              
              4.26
              %Connection
              
              
              5.67
              
              
              88
              %
              
              6.64
              
              
              98
              %
              
              -14.61
              %Gas
              
              
              0.81
              
              
              12
              %
              
              0.17
              
              
              2
              %
              
              376.47
              %
 
 Gross
        income from connection operations decreased 14.6%, from $6.64 million in
        2005 to
        $5.67 million in 2006, and accounted for 88% of total gross income in 2006.
        The
        decrease was due to the lower-than-expected increase in industrial customers
        described above.
 
 Gross
        income from gas sales increased 376%, from $170,000 in 2005 to 810,000 in
        2006,
        accounting for 12% of total gross income in2006, . The substantial increase
        was
        due to effective cost-control measures, reduced gas leakage in transportation
        and storage, and achange in the make-up of our customer base to include a
        greater proportion of higher-margin customers.
 
 Our
        gross
        margin decreased slightly, from 62.45% in 2005 to 59.62% in fiscal
        2006.
 
 31
 
 **Selling,
        General and Administrative Expenses**
 
 Selling
        expenses remained largely unchanged at $0.1 million for fiscal 2006. We incurred
        $1.22 million in general and administrative expenses in 2006, an increase
        of
        $600,000, or 40%, from the same period one year ago. General and administrative
        expenses are composed of fees related to business trips, phone usages, social
        insurance, depreciation, and office equipment, among other expenses. The
        increase is due to the increase in our operational projects, subsidiaries
        and
        employees. The table below sets forth our of general and administrative expenses
        in 2006:
  ($
                  million)
              For
                  the 12 months ended December 312006
              2005
              ChangeUS$
              US$
              %General
                  & administrative expenses
              1.22
              0.87
              40.23%
 
 We
        expect
        that general and administrative expenses will continue to grow in year 2007,
        as
        we expand our business and engage in more financing activities.
 
 **Other
        Income**
 Other
        Income was $ 0.58 million in 2006, an increase of 33% from $ 0.44 million
        in
        2005. Other income represents the income for our investment in 40% equity
        of
        Beijing Zhongran Xiangke Oil & Gas Tech Co.
 
 **Income
        tax**
 Income
        tax was $ 0.42
        million in
        fiscal 2006, 20% lower than $0.58 million in fiscal 2005. Pursuant to the
        tax
        laws of the PRC, general enterprises are subject to income tax at an effective
        rate of 33%. Sino Gas is in the natural gas industry, whose development is
        encouraged by the government. According to income tax regulation, any company
        engaged in the natural gas industry enjoys a favorable tax rate. In addition,
        Sino Gas has been certified by regulatory authorities as a high technology
        company and as such has been enjoying preferential income tax treatment under
        the PRC’s income tax policies. Under such policies, Sino Gas was exempt from
        corporate income taxes for the first two years commencing from its first
        profitable year, and thereafter will be entitled to a 50% tax reduction for
        the
        succeeding three years. Our first profitable tax year was 2003. Accordingly,
        our
        income would be subject to a reduced tax rate of 7.5% from 2005 to 2007.
        From
        2008, the income tax rate will be 9%. The
        subsidiaries of Sino Gas are subject to the effective rate of 33%, but almost
        all income is earned by Sino Gas.
 
 **Net
        Profit**
 Net
        profit for the twelve months ended December 31, 2006 was $5.17
        million ,
        a
        decrease of 9.41% from
        $5.70 million in the same period one year ago. It was due to the slight decrease
        of our revenues and substantial increase of expenses.
 
 Net
        profit margin in 2006 was 47.52% ,
        as
        compared with 52.28% in 2005. The 4.76% decrease
        in net profit margin was primarily the result of the decrease of connection
        fees, the margin of which is relatively higher than the margin of gas sales.
 
 In
        2007,
        we plan to actively acquire small-to-mid sized cities while penetrating the
        existing markets. We expect both the connection fees and the percentage of
        connection fees to net sales in 2007 will increase sizably, as compared with
        the
        levels in fiscal 2006. We expect to add 40,000 household users and two
        industrial users, and sell 21 million cubic meters of natural gas in 2007.
        The
        projected growth rate of our net income in 2007 is above 30% on a year-on-year
        basis.
 
 32
 **Cash
        and cash equivalents**
 Cash
        and
        cash equivalents was $ 6.76 million as of December 31, 2006, an increase
        of
        $6.19 million from one year ago. The major source of cash was from the Company’s
        financing activities. The money we use for investment and working capital
        normally comes from our shareholders and operating earnings. The Company
        completed two equity financings in September and November 2006 separately,
        with
        net proceeds of $7.43 million after deducting various fees related to financing.
        We used $1.48 million for the acquisitions of Yuxian Jinli and Xiahuayuan
        Jinli,
        and the rest for working capital and acquisitions in 2007.
 
 We
        borrowed RMB 19 million ($2,430,445) through a short-term loan from Shenzhen
        Development Bank for operational purposes in late 2006 by using $3 million
        from
        the two equity financings as collateral. Interest on the loan is payable
        at a
        rate of 5.022% per annum, and repayment of the loan is in May 2007. We repaid
        the loan in full in March 2007.
  
 **Cash
        Flows**
 
 Net
        Cash
        Flow from Financing Activities was $9.86 million in 2006, as compared with
        $0 in
        2005. We raised $7,430,965 by issuing common stock and $2,430,445 by borrowing
        debt from banks in 2006.
 
 Net
        Cash
        Flow from Operating Activities was $5.29 million in 2006, an increase of
        $2.43
        million from $2.86 million in 2005, primarily because we have successfully
        reduced accounts payable and other payables by $0.08 million in 2006, as
        compared with an increase of $3.56 million for the same period one year ago,
        and
        accounts receivable and other receivables decreased by $0.54 million in 2006,
        as
        compared with an increase of $6.14 million in 2005.
 Net
        Cash
        Outflow from Investment Activities was $12.27 million in 2006, an increase
        of
        nearly $9.3 million from $2.97 million in 2005. The table below is a breakdown
        of Cash Outflow from Investment Activities in 2006:
 
 Purchase
                  of plant and equipment
              
              $
              7,563,222Pledge
                  deposits
              
              
              3,124,541Payment
                  for the construction in progress
              
              
              1,556,579Payment
                  of cost of intangible assets
              
              
              21,511Net
                  cash used in investing activities
              
              $
              12,265,853
 
 We
        expect
        the returns on these investment activities will be visible on our financial
        statements in the near-to-middle term.
 
 **Accounts
        Receivable**
 Accounts
        Receivables as of December 31, 2006 was $6.44million, a decrease of $1.33
        million from $7.77 million one year ago. The collection period for accounts
        receivable in the natural gas distribution industry is usually no more than
        one
        year. Approximately 80% of accounts receivables incurred in 2005 were collected
        in 2006, and most of them were collected in the second half of the year,
        when
        natural gas distribution companies traditionally collect the majority of
        the
        connection fees for the distribution systems they construct.
 
 The
        table
        below is a breakdown of our 10 largest accounts receivable as of December
        31,
        2006.
 
 Shanghai
                  Datun Energy Resources Co., Ltd
              
              $
              1,509,641Jinzhou
                  City & Town Development & Construction Co.,Ltd
              
              
              639,591Xuzhou
                  Ganglong Real Estate Development Co.,Ltd
              
              
              559,232Kailuan(Group)
                  Weizhou Coal Mining Co.,Ltd
              
              
              532,139Hebei
                  Zhong Gang Steel Co., Ltd
              
              
              440,5861st
                  Machinery Works of North China Petroleum
              
              
              383,754Beijing
                  Kailong Real Estate Development Co.,Ltd
              
              
              299,328Beijing
                  Xincheng Real Estate Development Co.,Ltd
              
              
              282,604Pei
                  Xian Zheng Yuan Construction Engineering Co
              
              
              258,906Beijing
                  Hong Ji Co., Ltd
              
              
              227,754$
              5,133,535
  33
  All
        of
        the above accounts receivable are due within one year of aging.
 
 
 **Fixed
        Assets**
 Fixed
        Assets as of December 31, 2006 was $10.94 million, an increase of $7.59 million
        from $3.35 million in 2005. The table below is a breakdown of our fixed assets
        at cost:
 
 2006
              
              2005*At
                  Cost*Gas
                  Pipelines
              
              $
              8,255,231
              
              $
              2,819,341Motor
                  Vehicles
              
              
              2,204,621
              
              
              99,376Machinery
                  & Equipment
              
              
              273,943
              
              
              253,536Buildings
              
              
              89,799
              
              
              86,952Leasehold
                  Improvements
              
              
              47,543
              
              
              46,036Office
                  Equipment
              
              
              67,774
              
              
              41,607$
              10,938,911
              
              $
              3,346,848
  
 **Short
        term loans**
 Our
        short-term bank loans as of December 31, 2006 are as follows:
 2006
              
              
              2005Loans
                  from Shen Zhen Development Bank Co., Ltd.
              
              $
              2,430,445
 
 The
        half-year bank loan, with the interest rate of of 5.022% per annum, is due
        on
        May 22, 2007. Interest expense for the loan was $9,522 for the year ended
        December 31, 2006. We repaid the loan in full in March 2007.
  **Item
        7.**  **Financial
        Statements**
 
 **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006**
 **(Stated
        in US dollars)**


34
 
 **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
   **CONSOLIDATED
          FINANCIAL STATEMENTS**
 **DECEMBER
          31, 2006**
 **(Stated
          in US dollars)**
 
 
  **Sino
          Gas International Holdings, Inc.**
  CONTENTS
                PAGESREPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                    FIRM
                1CONSOLIDATED
                    BALANCE SHEET
                2
                    -
                    3CONSOLIDATED
                    STATEMENT OF INCOME
                4CONSOLIDATED
                    STATEMENT OF STOCKHOLDERS’ EQUITY
                5CONSOLIDATED
                    STATEMENT OF CASH FLOWS
                6NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS
                7
                    -
                    24
 
 
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To:
                The board of directors and stockholders
                  of
                  Sino
                    Gas International Holdings, Inc.
  We
          have
          audited the accompanying consolidated balance sheet of Sino Gas International
          Holdings, Inc. as of December 31, 2006 and the related consolidated statement
          of
          operations, stockholders' equity, and cash flows for the years then ended.
          These
          financial statements are the responsibility of the Company's management.
          Our
          responsibility is to express an opinion on these financial statements based
          on
          our audit.
 
 We
          conducted our audit in accordance with auditing standards of the Public
          Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audit provides a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of Sino Gas International Holdings,
          Inc. as of December 31, 2006 and the results of its operations, and its
          cash
          flows for the year then ended in conformity with accounting principles
          generally
          accepted in the United States of America.
  
 South
          San
          Francisco, California     Samuel
          H.
          Wong & Co., LLP
 []         Certified
          Public Accountants
  F-1
  **SINO
                    GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                    BALANCE SHEET****AS
                    AT DECEMBER 31, 2006****(Stated
                    in US Dollars)**
 
 Notes
                
                2006
                
                2005**Assets***Current
                    assets*Cash
                    and cash equivalents
                
                
                
                
                $
                3,638,673
                
                $
                571,194Pledged
                    deposits
                
                
                3
                
                
                3,124,541
                
                
                -Notes
                    receivable
                
                
                
                
                
                477,390
                
                
                -Accounts
                    receivable
                
                
                4
                
                
                6,534,740
                
                
                7,770,168Advances
                    to suppliers
                
                
                
                
                
                68,309
                
                
                372,442Prepaid
                    expenses
                
                
                
                
                
                141,878
                
                
                12,097Other
                    receivables
                
                
                5
                
                
                1,263,800
                
                
                437,922Total
                    current assets
                
                
                
                
                $
                15,249,331
                
                $
                9,163,823*Long
                    term assets*Investments
                    in equity securities
                
                
                
                
                $
                2,939,029
                
                $
                2,443,378Plant
                    and equipment, net
                
                
                6
                
                
                10,608,530
                
                
                3,200,682Construction
                    in progress
                
                
                
                
                
                4,628,076
                
                
                3,071,497Intangible
                    assets
                
                
                7
                
                
                457,830
                
                
                437,265Total
                    long term assets
                
                
                
                
                $
                18,633,465
                
                $
                9,152,822**Total
                    Assets**
                
                
                
                
                $
                33,882,796
                
                $
                18,316,645**Liabilities
                    and Shareholders’ Equities***Current
                    liabilities*Accounts
                    payable
                
                
                
                
                $
                3,891,388
                
                $
                3,090,870Short-term
                    bank loans
                
                
                8
                
                
                2,430,445
                
                
                -Other
                    payables
                
                
                9
                
                
                1,790,500
                
                
                2,264,965Unearned
                    revenue
                
                
                
                
                
                37,760
                
                
                133,035Accrued
                    liabilities
                
                
                
                
                
                325,922
                
                
                201,384Total
                    current liabilities
                
                
                
                
                $
                8,476,015
                
                $
                5,690,254**Total
                    Liabilities**
                
                
                
                
                $
                8,476,015
                
                $
                5,690,254
  F-2
  **SINO
                    GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                    BALANCE SHEET (Continued)****AS
                    AT DECEMBER 31, 2006****(Stated
                    in US Dollars)**
 
 Notes
                
                2006
                
                2005**STOCKHOLDERS’
                    EQUITY**Preferred
                      stock A US$0.001 par value; 20,000,000 authorized; nil and
                      nil issued and
                      outstanding as of December 31, 2006and 2005
                      respectively
                
                
                10
                
                $
                -
                
                $
                -Preferred
                      stock B US$0.001 par value; 5,000,000 authorized; 4,023,268
                      and nil issued
                      and outstanding as of December31, 2006 and 2005
                      respectively
                
                
                10
                
                
                4,023
                
                
                -Common
                      stock US$0.001 par value; 250,000,000 authorized; 14,692,647
                      and
                      14,361,646 issued and outstanding as of December 31, 2006 and
                      2005 respectively
                
                
                10
                
                
                14,693
                
                
                14,362Additional
                    paid-in-capital
                
                
                
                
                
                12,069,176
                
                
                4,812,650Statutory
                    reserves
                
                
                
                
                
                2,025,022
                
                
                1,219,720Retained
                    earnings
                
                
                
                
                
                10,469,571
                
                
                6,311,794Accumulated
                      other comprehensiveincome
                
                
                
                
                
                824,296
                
                
                267,865$
                25,406,781
                
                $
                12,626,391**TOTAL
                      LIABILITIES AND**STOCKHOLDERS’ EQUITY
                
                
                
                
                $
                33,882,796
                
                $
                18,316,645
  
 The
          accompanying notes are an integral part of these consolidated financial
          statements
  F-3
 
 **SINO
                    GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                    STATEMENT OF INCOME****FOR
                    THE YEAR ENDED DECEMBER 31, 2006****(Stated
                    in US Dollars)**
  Notes
                
                2006
                
                2005Net
                    revenues
                
                
                13
                
                $
                10,870,718
                
                $
                10,907,289Cost
                    of revenues
                
                
                
                
                
                (4,389,142
                )
                
                (4,132,391
                )Gross
                    profit
                
                
                
                
                $
                6,481,576
                
                $
                6,774,898Operating
                    expensesSelling
                    and marketing expenses
                
                
                
                
                
                (95,779
                )
                
                (99,768
                )General
                    and administrative expenses
                
                
                
                
                
                (1,155,849
                )
                
                (874,181
                )Income
                    from continuing operations
                
                
                
                
                $
                5,229,948
                
                $
                5,800,949Finance
                    costs, net
                
                
                11
                
                
                (78,237
                )
                
                (2,486
                )Other
                    income
                
                
                
                
                
                438,186
                
                
                437,750Other
                    expenses
                
                
                
                
                
                (856
                )
                
                (1,865
                )Income
                    before taxation
                
                
                
                
                $
                5,589,041
                
                $
                6,234,348Income
                    tax
                
                
                12
                
                
                (423,284
                )
                
                (531,915
                )Net
                    income
                
                
                
                
                $
                5,165,757
                
                $
                5,702,433
  Net
                    income per share,Basic
                
                $
                0.36
                
                $
                0.40Diluted
                
                
                0.32
                
                
                0.40Weighted
                    average shares outstanding of commonstock,Basic
                
                
                14,471,980
                
                
                14,361,646Diluted
                
                
                16,085,778
                
                
                14,361,646
  
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 F-4
 
 **SINO
                    GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                    STATEMENT OF STOCKHOLDERS’ EQUITY****FOR
                    THE YEAR ENDED DECEMBER 31, 2006****(Stated
                    in US Dollars)**
 
 AccumulatedAdditional
                
                
                
                
                
                otherPreferredstock
                    B
                
                Commonstock
                
                paid-in-
                
                Statutory
                
                Retained
                
                comprehensiveshares
                
                Amount
                
                Shares
                
                Amount
                
                capital
                
                reserves
                
                earnings
                
                income
                
                TotalBalance,
                    January 1, 2005
                
                
                -
                
                $
                -
                
                
                14,361,646
                
                $
                14,362
                
                
                4,812,650
                
                
                333,010
                
                
                1,496,071
                
                
                251
                
                
                6,656,344Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,702,433
                
                
                
                
                
                5,702,433Appropriations
                      to surplusreserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                886,710
                
                
                (886,710
                )Foreign
                      currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                267,614Balance,
                    December 31, 2005
                
                
                -
                
                $
                -
                
                
                14,361,646
                
                $
                14,362
                
                
                4,812,650
                
                
                1,219,720
                
                
                6,311,794
                
                
                267,865
                
                
                12,626,391Balance,
                    January 1, 2006
                
                
                -
                
                $
                -
                
                
                14,361,646
                
                $
                14,362
                
                
                4,812,650
                
                
                1,219,720
                
                
                6,311,794
                
                
                267,865
                
                
                12,626,391Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,165,757
                
                
                
                
                
                5,165,757Reverse
                    acquisition
                
                
                
                
                
                
                
                
                331,001
                
                
                331
                
                
                
                
                
                
                
                
                (202,678
                )
                
                
                
                
                (202,347
                )Issue
                    of stock and warrant
                
                
                4,023,268
                
                
                4,023
                
                
                
                
                
                
                
                
                7,256,526
                
                
                
                
                
                
                
                
                
                
                
                7,260,549Appropriations
                      to surplus reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                805,302
                
                
                (805,302
                )Foreign
                      currency translationadjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                556,431
                
                
                556,431Balance,
                    December 31, 2006
                
                
                4,023,268
                
                $
                4,023
                
                
                14,692,647
                
                $
                14,693
                
                
                12,069,176
                
                
                2,025,022
                
                
                10,469,571
                
                
                824,296
                
                
                25,406,781
 
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements
  F-5
  **SINO
                    GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                    STATEMENT OF CASH FLOWS****FOR
                    THE YEAR ENDED DECEMBER 31, 2006****(Stated
                    in US Dollars)**
 
 2006
                
                2005Cash
                    flows from operating activitiesNet
                    incomes
                
                $
                5,165,757
                
                $
                5,702,433Depreciation
                    and amortization
                
                
                155,374
                
                
                131,865Equity
                    in investments
                
                
                (495,651
                )
                
                (404,436
                )Decrease/(increase)
                    in accounts and other receivables
                
                
                106,512
                
                
                (6,139,281
                )Increase
                    in accounts and other payables
                
                
                355,316
                
                
                3,564,302Net
                    cash provided by operating activities
                
                $
                5,287,308
                
                $
                2,854,883Cash
                    flows from investing activitiesPurchase
                    of plant and equipment
                
                $
                (7,563,222
                )
                $
                (1,065,108
                )Pledge
                    deposits
                
                
                (3,124,541
                )
                
                -Payment
                    for the construction in progress
                
                
                (1,556,579
                )
                
                (1,537,774
                )Payment
                    of cost of intangible assets
                
                
                (20,565
                )
                
                (365,145
                )Net
                    cash used in investing activities
                
                $
                (12,264,907
                )
                $
                (2,968,027
                )Cash
                    flows from financing activitiesIssue
                    of common stock
                
                
                7,430,965
                
                
                -Bank
                    borrowings, net of repayment
                
                
                2,430,445
                
                
                -Net
                    cash provided by financing activities
                
                $
                9,861,410
                
                $
                -Net
                    in cash and cash equivalents sourced/(used)
                
                
                2,883,811
                
                
                (113,144
                )Effect
                    of foreign currency translation on cashand
                    cash equivalents
                
                
                183,668
                
                
                15,992Cash
                    and cash equivalents-beginning of year
                
                
                571,194
                
                
                668,346Cash
                    and cash equivalents-end of year
                
                $
                3,638,673
                
                $
                571,194Supplementary
                    cash flow information:Interest
                    received
                
                $
                3,268
                
                $
                3,484Interest
                    paid
                
                
                9,522
                
                
                -
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements
  F-6
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **1.** **PRINCIPAL
          ACTIVITIES, BASIS OF PRESENTATION AND ORGANIZATION**
 
 *Principal
          Activities*
 
 Sino
          Gas
          International Holdings, Inc. (“the Company”) was incorporated under the laws of
          the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
          changed its name to American Arms, Inc. on April 5, 1984, and then changed
          its
          name to Dolce Ventures, Inc. on May 21, 2002, and changed its name to Sino
          Gas
          International Holdings, Inc. on November 17, 2006. The Company is a natural
          gas
          services operator, principally engaging in the investment, operation and
          management of city gas pipeline infrastructure, in the distribution of
          natural
          gas to residential and industrial users, in the construction and operation
          gas
          stations, and in the development and application of natural gas related
          technologies.
 
 The
          common stock of the Company is currently quoted on the National Association
          of
          Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS.”
 
 *Basis
          of Presentation and Organization*
 
 On
          September 7, 2006, the Company consummated a share exchange transaction
          with the
          shareholders of GAS Investment China Co., Ltd. (Gas (BVI)), whereby the
          Company
          exchanged 14,361,646 shares of its series A convertible preferred stock,
          par
          value $0.001 per share for all of the issued and outstanding stock of Gas
          (BVI)
          held by the shareholders of Gas (BVI). As a result of the share exchange
          transaction, Gas (BVI) became its wholly-owned subsidiary, and Beijing
          Zhong Ran
          Wei Ye Gas Co., Ltd (Beijing Gas) became its indirectly wholly-owned subsidiary.
          In addition, as a result of the share exchange transaction, the Company
          ceased
          being a shell company as such term is defined in Rule 12b-2 under the Exchange
          Act and are now engaged in the development of natural gas distribution
          systems
          and the distribution and supply of natural gas in the PRC.
 
 The
          share
          exchange transaction has been accounted for as a capital-raising transaction
          of
          the Company whereby the historical financial statements and operations
          of
          GAS(BVI) are consolidated using historical carrying amounts. The 331,001
          shares
          of the Company outstanding prior to the stock exchange transaction were
          accounted for at the net book value at the time of the transaction, which
          was a
          deficit of $202,678. The accompanying consolidated financial statements
          reflect
          the capital-raising transaction of the Company as if the transaction occurred
          as
          of the beginning of the first period presented.
  The
          Company’s consolidated financial statements have been prepared in accordance
          with generally accepted accounting principles in the United States of America
          (“US GAAP”).
  This
          basis of accounting differs in certain material respects from that used
          for the
          preparation of the books of account of the Company’s principal subsidiaries,
          which are prepared in accordance with the accounting principles and the
          relevant
          financial regulations applicable to enterprises with limited liabilities
          established in the PRC (“PRC GAAP”) or in the accounting standards used in the
          places of their domicile. The accompanying consolidated financial statements
          reflect necessary adjustments not recorded in the books of account of the
          Company’s subsidiaries to present them in conformity with US GAAP.
  F-7
 
 **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **1.
          PRINCIPAL ACTIVITIES BASIS OF PRESENTATION AND ORGANIZATION
          (CONTINUED)**
 
 On
          November 17, 2006, the Company changed its name to Sino Gas International
          Holdings, Inc., announced its new trading symbol, “SGAS,” and effected a
          304.44-for-1 reverse stock split.
 
 The
          Company consummated two private financing transactions on September 7,
          2006 and
          October 20, 2006, respectively, in which the Company issued an aggregate
          of
          4,023,268 shares of its series B convertible preferred stock, and warrants
          to
          purchase an aggregate of 13,257,293 shares of its common stock, in exchange
          for
          $9,281,600 gross cash proceeds. The two private financing transactions
          were
          consummated on substantially the same terms and conditions. The share exchange
          transaction and its private financing transactions are collectively referred
          to
          hereafter as the “reverse merger transaction”.
 
 As
          a
          result of the consummation of the reverse merger transaction, the Company
          are
          now engaged in the development of natural gas distribution systems in small-
          and
          medium-sized cities in the PRC, as well as the distribution of natural
          gas to
          residential, commercial and industrial customers in the PRC, through its
          indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.
          The
          Company still own Pegasus Tel, but plan to spin it off in the form of a
          dividend
          to our shareholders of record as of August 30, 2006.
 
 *Recent
          Acquisitions*
 
 On
          December 13, 2006, Beijing Gas entered into a stock transfer agreement
          with the
          shareholders of Zhangjiakou City Xiahuayuan Jinli Gas Ltd. Co., a limited
          liability company organized under the laws of the PRC (“Xiahuayuan Jinli”),
          under which Beijing Gas acquired all the capital stock of Xiahuayuan Jinli
          for a
          purchase price of RMB two million (or approximately $258,000) in cash.
          Xiahuayuan Jinli is now a wholly-owned subsidiary of Beijing Gas. Xiahuayuan
          Jinli is a small regional natural gas distributor in Hebei Province, PRC.
 
 Also
          on
          December 13, 2006, Beijing Gas entered into a stock transfer agreement
          with
          Yuxian Jinli Gas Ltd. Co. (“Yuxian Jinli”), a limited liability company
          organized under the laws of the PRC, under which Beijing Gas acquired all
          the
          capital stock of Yuxian Jinli for a purchase price of RMB9.5 million (or
          approximately $1,227,000) in cash. All the capital stock of Xiahuayuan
          Jinli and
          that of Yuxian Jinli were held by the same shareholders immediately prior
          to the
          signing of these agreements. Yuxian Jinli is now a wholly-owned subsidiary
          of
          Beijing Gas. Yuxian Jinli is a small regional natural gas distributor in
          Hebei
          Province, PRC.
 
 F-8
 
 **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **2.** **SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *(a)*
                *Method
                    of Accounting*
 
 The
          Company maintains its general ledger and journals with the accrual method
          accounting for financial reporting purposes. The financial statements and
          note
          are representations of management. Accounting policies adopted by the Company
          conform to generally accepted accounting principles in the United States
          of
          America and have been consistently applied in the presentation of financial
          statements, which are compiled on the accrual basis of accounting.
 
 *(b)*
                *Use
                    of Estimates*
 
 In
          preparing of the consolidated financial statements in conformity with accounting
          principles generally accepted in the United States of America, management
          makes
          estimates and assumptions that affect the reported amounts of assets and
          liabilities and disclosures of contingent assets and liabilities at the
          dates of
          the consolidated financial statements, as well as the reported amounts
          of
          revenues and expenses during the reporting year. These accounts and estimates
          include, but are not limited to, the valuation of accounts receivable,
          inventories, deferred income taxes and the estimation on useful lives of
          plant
          and machinery. Actual results could differ from those estimates.
 
 *(c)*
                *Economic
                    and Political Risks*
 
 The
          Company’s operations are conducted in the PRC. Accordingly, the Company’s
          business, financial condition and results of operations may be influenced
          by the
          political, economic and legal environment in the PRC, and by the general
          state
          of the PRC economy.
 
 The
          Company’s operations in the PRC are subject to special considerations and
          significant risks not typically associated with companies in North America
          and
          Western Europe. These include risks associated with, among others, the
          political, economic and legal environment and foreign currency exchange.
          The
          Company’s results may be adversely affected by changes in the political and
          social conditions in the PRC, and by changes in governmental policies with
          respect to laws and regulations, anti-inflationary measures, currency
          conversion, remittances abroad, and rates and methods of taxation, among
          other
          things.
  F-9
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **2.
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *(d)*
                *Principles
                    of Consolidation*
 
 The
          consolidated financial statements include the accounts of the Company and
          its
          subsidiaries (“the Group”). Significant inter-company transactions have been
          eliminated in consolidation. Investments in which the company has a 20
          percent
          to 50 percent voting interest and where the company exercises significant
          influence over the investor are accounted for using the equity
          method.
 
 As
          of
          December 31, 2006, the particulars of the subsidiaries are as
          follows:
  Name
                    of Company
                
                Place
                    of Incorporation
                
                Date
                    of Incorporation
                
                Beneficiary
                    interest %
                Equity
                  Interest
                    %
                
                Registered
                  CapitalGAS
                    Investment China Co., Ltd.
                
                The
                    BritishVirgin
                    Islands
                
                6/19/2003
                
                100
                100
                
                USD10,000,000Pegasus
                    Tel, Inc.
                
                State
                    ofDelaware,USD
                
                2/19/2002
                
                100
                100
                
                USD
                    1,000Beijing
                    Zhong Ran Wei Ye Gas Co., Ltd
                
                PRC
                
                8/29/2001
                
                100
                100
                
                RMB
                    94,448,517Ningjin
                    Weiye Gas Co., Ltd
                
                PRC
                
                12/3/2003
                
                100
                95
                
                RMB
                    3,000,000Jinzhou
                    Weiye Gas Co., Ltd
                
                PRC
                
                7/19/2004
                
                100
                95
                
                RMB
                    5,000,000Xingtang
                    Weiye Gas Co., Ltd
                
                PRC
                
                2/18/2004
                
                100
                95
                
                RMB
                    3,000,000Linzhang
                    Weiye Gas Co., Ltd
                
                PRC
                
                7/6/2005
                
                100
                85
                
                RMB
                    1,000,000Anping
                    Weiye Gas Co., Ltd
                
                PRC
                
                8/4/2005
                
                100
                95
                
                RMB
                    5,000,000Wuqiao
                    Gas Co., Ltd
                
                PRC
                
                6/30/2004
                
                100
                95
                
                RMB
                    2,000,000Yutian
                    Zhongran Weiye Gas Co.,Ltd
                
                PRC
                
                12/19/2003
                
                100
                90
                
                RMB
                    3,000,000Sihong
                    Weiye Gas Co., Ltd
                
                PRC
                
                12/3/2004
                
                100
                95
                
                RMB10,000,000Langfang
                    Development Region WeiyeDangerous
                    Goods Transportation Co., Ltd
                
                PRC
                
                3/22/2005
                
                100
                95
                
                RMB
                    1,000,000Peixian
                    Weiye Gas Co., Ltd
                
                PRC
                
                8/22/2005
                
                100
                90
                
                RMB
                    5,000,000Sishui
                    Weiye Gas Co., Ltd
                
                PRC
                
                12/22/2004
                
                100
                95
                
                RMB
                    3,000,000LongyaoZhongranWeiyeGasCo.,Ltd
                
                PRC
                
                10/13/2005
                
                100
                95
                
                RMB
                    3,000,000Shenzhou
                    Weiye Gas Co., Ltd
                
                PRC
                
                12/23/2005
                
                100
                95
                
                RMB
                    3,000,000Hengshui
                    Weiye Gas Co., Ltd
                
                PRC
                
                12/20/2005
                
                100
                95
                
                RMB
                    3,000,000Changli
                    Weiye Gas Co., Ltd
                
                PRC
                
                12/8/2006
                
                100
                95
                
                RMB
                    3,000,000Yuxian
                    Jinli Gas Co., Ltd
                
                PRC
                
                11/8/2005
                
                100
                100
                
                RMB
                    9,500,000Zhangjiakou
                    City Xiahuayuan Jinli GasCo.,
                    Ltd
                
                PRC
                
                9/30/2005
                
                100
                100
                
                RMB
                    2,000,000
 
 
 *(e)*
                *Cash
                    and Cash Equivalents*
 
 The
          Company considers all cash and other highly liquid investments with initial
          maturities of three months or less to be cash equivalents.
  F-10
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **2.
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *(f)*
                *Accounts
                    and Other Receivable*
 
 Accounts
          and other receivable are recorded at net realizable value consisting of
          the
          carrying amount less an allowance for uncollectible accounts, as needed.
          The
          Company extends unsecured credit to customers in the normal course of business
          and does not accrue interest on trade accounts receivable. Allowance for
          uncollectible accounts as of December 31, 2006 is not significant.
 
 *(g)*
                Advances
                    to Suppliers
 
 Advances
          to suppliers represent the cash paid in advance for purchasing raw materials.
          The advances to suppliers are interest free and unsecured.
 
 *(h)*
                *Investments
                    in Equity Securities*
 
 The
          consolidated statement of income includes the Group's share of the
          post-acquisition results of its associate for the year. In the consolidated
          balance sheet, investments in equity securities are stated at the Group's
          share
          of the net assets of the associates plus the premium paid less any discount
          on
          acquisition in so far as it has not already been amortized to the statement
          of
          income, less any identified impairment loss.
 
 *Portion
                    of**Nominal**Name
                    of*
                *Place*
                
                *Form
                    of*
                
                
                
                *Value
                    of**Associate*
                *of*
                
                *Business*
                
                *Registered*
                
                *Registered*
                
                *Principal**Company*
                *Registration*
                
                *Structure*
                
                *Capital*
                
                *Capital*
                
                *Activities*Beijing
                    Zhongran Xiangke Oil Gas Technology Co. Ltd
                PRC
                
                Sino-foreign
                    equity joint venture
                
                RMB
                  20,000,000
                
                40
                
                Trading
                    of natural gas and gas pipeline
                    construction
 
 Beijing
          Zhongran Xiangke Oil Gas Technology Co. Ltd is the Group's 40% owned joint
          Venture company and is principally engaged in sale of compressed natural
          gas to
          domestic households and industrial around sub-urban areas of Beijing and
          part of
          sub-urban areas in Hebei Province and Tianjin.
  F-11
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **2.
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *(i)*
                *Accounting
                    for the Impairment of Long-Lived
                    Assets*
 
 The
          long-lived assets held and used by the Company are reviewed for impairment
          whenever events or changes in circumstances indicate that the carrying
          amount of
          assets may not be recoverable. It is reasonably possible that these assets
          could
          become impaired as a result of technology or other industry changes.
          Determination of recoverability of assets to be held and used is by comparing
          the carrying amount of an asset to future net undiscounted cash flows to
          be
          generated by the assets.
 
 If
          such
          assets are considered to be impaired, the impairment to be recognized is
          measured by the amount by which the carrying amount of the assets exceeds
          the
          fair value of the assets. Assets to be disposed of are reported at the
          lower of
          the carrying amount or fair value less costs to sell.
 
 During
          the reporting year, there was no impairment loss.
 
 *(j)*
                *Plant
                    and Equipment*
 
 Plant
          and
          equipment, other than construction in progress, are stated at cost less
          depreciation and amortization and accumulated impairment loss.
 
 Plant
          and
          equipment are carried at cost less accumulated depreciation. Depreciation
          is
          provided over their estimated useful lives, using the straight-line method.
          Estimated useful lives of the plant and equipment are as follows:
 
 Gas
                    Pipelines
                25
                    yearsMotor
                    Vehicles
                10
                    yearsMachinery
                    & Equipment
                20
                    yearsBuildings
                25
                    yearsLeasehold
                    Improvements
                25
                    yearsOffice
                    Equipment
                8
                    years
 
 The
          cost
          and related accumulated depreciation of assets sold or otherwise retired
          are
          eliminated from the accounts and any gain or loss is included in the statement
          of income. The cost of maintenance and repairs is charged to income as
          incurred,
          whereas significant renewals and betterments are capitalized.
 
 *(k)*
                *Intangible
                    Assets*
 
 Intangible
          assets, are stated at cost less amortization and accumulated impairment
          loss.
          Amortization is provided over their estimated useful lives, using the
          straight-line method. Estimated useful lives of the intangibles are as
          follows:
 
 Land
                    use rights
                40
                    - 50 yearsFranchises
                30
                    yearsOther
                    intangibles
                3
                    years
  F-12
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 *(l)*
                *Construction
                    in progress*
 
 Construction
          in progress represents the cost of constructing pipelines and is stated
          at cost.
          Costs comprise direct and indirect incremental costs of acquisition or
          construction. Completed items are transferred from construction in progress
          to
          the gas pipelines of fixed assets when they are ready for their intended
          use.
          The major cost of construction relates to construction materials, direct
          labor
          wages and other overhead. Construction of pipeline, through which to distribute
          natural gas, is one of the Group’s principal businesses. The Group builds city
          main pipeline network and branch pipeline network to make gas connection
          to
          resident users, industrial, and commercial users, with the objective of
          generating revenue on gas connection and gas usage fees collected from
          these
          customers. As at December 31, 2006, the pipelines under construction include
          mainly the projects in several cities of Hebei and Jiangsu province, and
          in
          Beijing. These projects, once completed, will significantly increase the
          gas
          supply capacity. Capital commitments in respect of these projects amounted
          to
          approximately $5 million at December 31, 2006 *.*
 
 *(m)*
                *Unearned
                    Revenue*
 
 Unearned
          revenue represents prepayments by customers for gas purchases and advance
          payments on construction and installation of pipeline contracts. The Company
          records such prepayment as unearned revenue when the payments are
          received.
 
 *(n)*
                *Financial
                    Instruments*
 
 The
          carrying amounts of all financial instruments approximate fair value. The
          carrying amounts of cash, accounts receivable, accounts payable and accrued
          liabilities approximate fair value due to the short-term nature of these
          items.
          The carrying amounts of borrowings approximate the fair value based on
          the
          Company’s expected borrowing rate for debt with similar remaining maturities and
          comparable risk.
 
 *(o)*
                *Foreign
                    Currency Translation*
 
 The
          accompanying consolidated financial statements are presented in United
          States
          dollars. The functional currency of the Company is the Renminbi (RMB).
          The
          consolidated financial statements are translated into United States dollars
          from
          RMB at year-end exchange rates as to assets and liabilities and average
          exchange
          rates as to revenues and expenses. Capital accounts are translated at their
          historical exchange rates when the capital transactions occurred.
 
 **2006**Year
                    end RMB : US$ exchange rate
                
                
                7.8175Average
                    yearly RMB : US$ exchange rate
                
                
                7.9819
 
 The
          RMB
          is not freely convertible into foreign currency and all foreign exchange
          transactions must take place through authorized institutions. No representation
          is made that the RMB amounts could have been, or could be, converted into
          US$ at
          the rates used in translation.
  F-13
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 *(p)*
                *Revenue
                    Recognition*
 
 Revenue
          is recognized when services are rendered to customers when a formal arrangement
          exists, the price is fixed or determinable, the delivery is completed,
          no other
          significant obligations of the Company exist and collectibility is reasonably
          assured. Payments received before all of the relevant criteria for revenue
          recognition are satisfied are recorded as unearned revenue.
 
 Net
          sales, which consist of gas and connection fee revenue. And the cost of
          sales
          consists of gas cost and connection cost.
 
 Gas
          connection revenue is recognized when the outcome of a contract can be
          estimated
          reliably and the stage of completion at the balance sheet date can be measured
          reliably.
 
 Sales
          of
          natural gas are recognized when goods are delivered and title has
          passed.
 
 *(q)*
                *Other
                    Income*
 
 Other
          income represents the Group’s share of post- acquisition results of its
          investment in equity securities for the year.
 
 *(r)*
                *Income
                    Taxes*
 
 Deferred
          income taxes are recognized for the tax consequences in future years of
          differences between the tax bases of assets and liabilities and their financial
          reporting amounts at each period end based on enacted tax laws and statutory
          tax
          rates applicable to the periods in which the differences are expected to
          affect
          taxable income. Valuation allowances are established when necessary to
          reduce
          deferred tax assets to the amount expected to be realized. At December
          31, 2006,
          there was no significant book to tax differences.
 
 Pursuant
          to the tax laws of PRC, general enterprises are subject to income tax at
          an
          effective rate of 33%. Beijing Gas is in the natural gas industry whose
          development is encouraged by the government. According to the income tax
          regulation, any company engaged in the natural gas industry enjoys a favorable
          tax rate. Also, Beijing Gas is exempt from corporate income tax for its
          first
          two years and is then entitled to a 50% tax reduction for the succeeding
          three
          years. The Company’s first profitable tax year was 2003. Accordingly, the
          Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
          the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
          Beijing Gas are subject to the effective rate of 33%.
 
 (s)
                Advertising
 
 The
          Group
          expensed all advertising costs as incurred. Advertising costs for the year
          ended
          December 31, 2006 was insignificant.
 
 (t)
                Concentration
                    of Credit Risk
 
 Concentration
          of credit risk is limited to accounts receivable and is subject to the
          financial
          conditions of major customers. The Group does not require collateral or
          other
          security to support accounts receivable. The Group conducts periodic reviews
          of
          its clients’ financial condition and customers’ payment practices to minimize
          collection risk on accounts receivable.
  F-14
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **2.**  **SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**
 
 (u)
                Retirement
                    Benefits
 
 Retirement
          benefits in the form of contributions under defined contribution retirement
          plans to the relevant authorities are charged to the statements of income
          as
          incurred.
 
 (v)
                Statutory
                    Surplus Reserves
 
 As
          stipulated by the Company Law of the People's Republic of China (PRC) as
          applicable to Chinese companies with foreign ownership, net income after
          taxation can only be distributed as dividends after appropriation has been
          made
          for the following:
 
 i.  Making
          up
          cumulative prior years' losses, if any;
 
 ii.  Allocations
          to the "Statutory surplus reserve" of at least 10% of income after tax,
          as
          determined under PRC accounting rules and regulations, until the fund amounts
          to
          50% of the Company's registered capital;
 
 iii.  Allocations
          of 5-10% of income after tax, as determined under PRC accounting rules
          and
          regulations, to the Company's "Statutory common welfare fund", which is
          established for the purpose of providing employee facilities and other
          collective benefits to the Company's employees; and
 
 iv.  Allocations
          to the discretionary surplus reserve, if approved in the shareholders'
          general
          meeting.
 
 The
          Group
          has appropriated $808,404 as reserve for the statutory surplus reserve
          and
          welfare fund for the year ended December 31, 2006.
 
 Surplus
          reserves consist of the following as of December 31, 2006
 
 Statutory
                    surplus reserve
                
                $
                1,346,053Statutory
                    common welfare fund
                
                
                678,969$
                2,025,022
  F-15
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **2.**  **SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**
 
 *(w)*
                *Statement
                    of Cash Flows*
 
 In
          accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
          the Company’s operations is calculated based upon the local currencies. As a
          result, amounts related to assets and liabilities reported on the statement
          of
          cash flows will not necessarily agree with changes in the corresponding
          balances
          on the balance sheet.
  *(r)*
                *Comprehensive
                    Income*
 
 Comprehensive
          income is defined to include all changes in equity except those resulting
          from
          investments by owners and distributions to owners. Among other disclosures,
          all
          items that are required to be recognized under current accounting standards
          as
          components of comprehensive income are required to be reported in a financial
          statement that is presented with the same prominence as other consolidated
          financial statements. The Company’s current component of other comprehensive
          income is the foreign currency translation adjustment.
 
 *(s)*
                *Recent
                    Accounting Pronouncements*
  In
          July
          2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
          Interpretation of FASB Statement No. 109, which clarifies the accounting
          for
          uncertainty in tax positions. This Interpretation requires that the Company
          recognizes in its consolidated financial statements the impact of a tax
          position
          if that position is more likely than not of being sustained on audit, based
          on
          the technical merits of the position. The provisions of FIN 48 are effective
          for
          the Company on January 1, 2007, with the cumulative effect of the change
          in
          accounting principle, if any, recorded as an adjustment to opening retained
          earnings.
  In
          September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
          defines
          fair value, establishes a framework for measuring fair value in generally
          accepted accounting principles, and expands disclosures about fair value
          measurements. SFAS 157 applies under other accounting pronouncements that
          require or permit fair value measurements, where fair value is the relevant
          measurement attribute. The standard does not require any new fair value
          measurements. SFAS 157 is effective for financial statements issued for
          fiscal
          years beginning after November 15, 2007, and interim periods within those
          fiscal
          years.
 
 In
          September 2006, the SEC issued SAB No. 108, which provides guidance on
          the
          process of quantifying financial statement misstatements. In SAB No. 108,
          the
          SEC staff establishes an approach that requires quantification of financial
          statement errors, under both the iron-curtain and the roll-over methods,
          based
          on the effects of the error on each of the Company’s financial statements and
          the related financial statement disclosures. SAB No.108 is generally effective
          for annual financial statements in the first fiscal year ending after November
          15, 2006. The transition provisions of SAB No. 108 permits existing public
          companies to record the cumulative effect in the first year ending after
          November 15, 2006 by recording correcting adjustments to the carrying values
          of
          assets and liabilities as of the beginning of that year with the offsetting
          adjustment recorded to the opening balance of retained earnings.
 
 The
          management of the Company does not anticipate that the adoption of these
          three
          standards will have a material impact on these consolidated financial
          statements.
  F-16
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **3.** **PLEDGE
          DEPOSITS**
 
 Pledged
          deposits are restricted cash with bank for general banking
          facilities.
  **4.** **ACCOUNTS
          RECEIVABLE**
 
 The
          followings are the largest ten accounts receivable as at December 31
          2006
 
 Shanghai
                    Datun Energy Resources Co., Ltd
                
                $
                1,509,641Jinzhou
                    City & Town Development & Construction Co.,Ltd
                
                
                639,591Xuzhou
                    Ganglong Real Estate Development Co.,Ltd
                
                
                559,232Kailuan(Group)
                    Weizhou Coal Mining Co.,Ltd
                
                
                532,139Hebei
                    Zhong Gang Steel Co., Ltd
                
                
                440,5861st
                    Machinery Works of North China Petroleum
                
                
                383,754Beijing
                    Kailong Real Estate Development Co.,Ltd
                
                
                299,328Beijing
                    Xincheng Real Estate Development Co.,Ltd
                
                
                282,604Pei
                    Xian Zheng Yuan Construction Engineering Co
                
                
                258,906Beijing
                    Hong Ji Co., Ltd
                
                
                227,754$
                5,133,535
 
 All
          of
          the above accounts receivable are due within one year of aging.
  **5.** **OTHER
          RECEIVABLES**
 
 Other
          receivables at December 31, consist of the following:
 
 2006
                
                2005Deposit
                    paid
                
                $
                543,013
                
                $
                104,483Amounts
                    due from employees
                
                
                86,464
                
                
                188,715Amounts
                    due from shareholders
                
                
                -
                
                
                22,004Sundry
                    receivables
                
                
                634,323
                
                
                122,720$
                1,263,800
                
                $
                437,922
 
 Amounts
          due from employees are advances for business traveling and purchases of
          consumables. All the amounts due from employees/shareholders are unsecured,
          interest free, and have no fixed repayment terms.
  F-17
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **6.** **PLANT
          AND EQUIPMENT, NET**
 
 Plant
          and
          Equipment consist of the following as of December 31:
 
 2006
                
                2005*At
                    Cost*Gas
                    Pipelines
                
                $
                8,255,231
                
                $
                2,819,341Motor
                    Vehicles
                
                
                2,204,621
                
                
                99,376Machinery
                    & Equipment
                
                
                273,943
                
                
                253,536Buildings
                
                
                89,799
                
                
                86,952Leasehold
                    Improvements
                
                
                47,543
                
                
                46,036Office
                    Equipment
                
                
                67,774
                
                
                41,607$
                10,938,911
                
                $
                3,346,848*Less**:
                    Accumulated depreciation*Gas
                    Pipelines
                
                $
                203,005
                
                $
                80,557Motor
                    Vehicles
                
                
                48,846
                
                
                21,319Machinery
                    & Equipment
                
                
                38,999
                
                
                23,969Buildings
                
                
                6,825
                
                
                3,304Leasehold
                    Improvements
                
                
                19,613
                
                
                9,849Office
                    Equipment
                
                
                13,093
                
                
                7,168$
                330,381
                
                $
                146,166$
                10,608,530
                
                $
                3,200,682
 
 Depreciation
          and amortization expense is included in the consolidated statements of
          income
          and comprehensive income for the year December 31, 2006 is as
          follows:
 
 2006
                
                2005Cost
                    of revenues
                
                $
                87,155
                
                $
                79,118Selling
                    and marketing expenses
                
                
                18,645
                
                
                2,413General
                    and administrative expenses
                
                
                49,574
                
                
                50,334$
                155,374
                
                $
                131,865
  F-18
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **7.** **INTANGIBLE
          ASSETS**
 
 Intangible
          assets consist of the following as of December 31:
  2006
                
                2005Land
                    use rights
                
                $
                112,565
                
                $
                99,881Franchises
                
                
                336,318
                
                
                337,012Other
                    intangibles
                
                
                8,947
                
                
                372$
                457,830
                
                $
                437,265
 
 The
          Group
          operates as a local natural gas distributor in a city or county, known
          as an
          operation location, under an exclusive franchise agreement between the
          Group and
          the local government or entities in charge of gas utility. Franchises are
          the
          rights to develop sites in Anping and Jinzhou in China. They are stated
          at cost
          less accumulated depreciation.
 
 
 **8.** **SHORT
          TERM BANK LOANS**
 
 Short-term
          bank loans are as follows:
  2006
                
                2005Loans
                    from Shen Zhen Development Bank Co., Ltd,interest
                    rate at 5.022% per annumDue
                    May 22, 2007
                
                $
                2,430,445
                
                $
                -
 
 Interest
          expense for the short term bank loans was $9,522 for the year ended December
          31,
          2006.
  F-19
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **9.** **OTHER
          PAYABLES**
 
 Other
          payables at December 31, 2005 and 2006 consist of the following:
 
 2006
                
                2005Deposit
                    received
                
                $
                -
                
                $
                67,934Amounts
                    due to employees
                
                
                11,360
                
                
                3,528Employees’
                    welfare payables
                
                
                56,584
                
                
                50,207Tax
                    payable
                
                
                1,089,804
                
                
                790,057Loan
                    from an unrelated company - Qian Shi Li
                
                
                -
                
                
                681,250Loan
                    from an unrelated company - Shi Yi Long Da
                
                
                -
                
                
                500,409Sundry
                    payables
                
                
                632,752
                
                
                171,580$
                1,790,500
                
                $
                2,264,965
 
 All
          the
          amounts due to employees are unsecured, interest free, and have no fixed
          repayment terms. Loan from Shenzhen Shi Yi Long Da Co., Ltd (Shi Yi Long
          Da) is
          unsecured, interest at 6% per annum and due October 2006. This money has
          been
          paid on October 2006. Loan from Beijing Qian Shi Li Technology Development
          Co.,Ltd (Qian Shi Li) is unsecured, interest free, and have no fixed repayment
          terms.
  **10.**  **CAPITAL
          STOCK**
 
 The
          authorized capital stock consists of (i) 250,000,000 shares of common stock,
          par
          value $0.001 per share, of which there are 14,692,647 shares issued and
          outstanding, and (ii) 100,000,000 shares of preferred stock, par value
          $0.001
          per share. The preferred stock consists of (i) series A convertible preferred
          stock, of which 20,000,000 shares have been authorized and no shares are
          issued
          and outstanding; and (ii) series B convertible preferred stock, of which
          5,000,000 shares have been authorized and 4,023,268 shares are issued and
          outstanding.
 
 The
          following is a summary of the material terms of its capital stock. This
          summary
          is subject to and qualified in its entirety by its Articles of Incorporation,
          as
          amended and corrected, certificates of designations for its series A and
          series
          B convertible preferred stock, its by-laws and by the applicable provisions
          of
          Utah law.
 
 F-20
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **10.
          CAPITAL STOCK (Continued)**
 
 *Common
          Stock*
 
 The
          Company is authorized to issue 250,000,000 shares of common stock, with
          a par
          value of $0.001. There are 14,692,647 shares of common stock issued and
          outstanding as of December 31, 2006. All shares of common stock have one
          vote
          per share on all matters including election of directors, without provision
          for
          cumulative voting. The common stock is not redeemable and has no conversion
          or
          preemptive rights. The common stock currently outstanding is validly issued,
          fully paid and non-assessable. In the event of liquidation of the company,
          the
          holders of common stock will share equally in any balance of the company's
          assets available for distribution to them after satisfaction of creditors
          and
          preferred shareholders, if any. The holders of common stock are entitled
          to
          equal dividends and distributions per share with respect to the common
          stock
          when, as and if, declared by the board of directors from funds legally
          available.
 
 *Preferred
          Stock*
 
 In
          addition to the 250,000,000 shares of common stock, The Company is authorized
          to
          issue 100,000,000 shares of preferred stock, with a par value of $0.001
          per
          share. Shares of the preferred stock may be issued from time to time in
          one or
          more classes or series, each of which class or series shall have such
          distinctive designation or title as shall be fixed by the board of directors
          prior to the issuance.
 
 The
          issuance of shares of preferred stock, or the issuance of rights to purchase
          such shares, could be used to discourage an unsolicited acquisition proposal.
          For instance, the issuance of a series of preferred stock might impede
          a
          business combination by including class voting rights that would enable
          the
          holder to block such a transaction, or facilitate a business combination
          by
          including voting rights that would provide a required percentage vote of
          the
          stockholders. In addition, under certain circumstances, the issuance of
          preferred stock could adversely affect the voting power of the holders
          of the
          common stock. Although the board of directors is required to make any
          determination to issue such stock based on its judgment as to the best
          interests
          of its stockholders, the board of directors could act in a manner that
          would
          discourage an acquisition attempt or other transaction that some, or a
          majority,
          of the stockholders might believe to be in their best interests or in which
          stockholders might receive a premium for their stock over the then market
          price
          of such stock. The board of directors does not at present intend to seek
          stockholder approval prior to any issuance of currently authorized preferred
          stock, unless otherwise required by law.
  On
          August
          30, 2006, the Company’s board of directors designated 20,000,000 shares of its
          authorized $0.001 par value per share preferred stock as series A convertible
          preferred stock and 5,000,000 shares of its preferred stock as series B
          convertible preferred stock. On August 31, 2006, the Company filed certificates
          of designations for the series A and series B convertible preferred stock
          with
          the Office of the Secretary of State of Utah. On September 6, 2006, the
          board of
          directors amended the designations of the Series B convertible preferred
          stock
          and the Company filed an amended certificate of designations for the Series
          B
          convertible preferred stock with the Office of the Secretary of State of
          Utah.
          The board of directors created the series A convertible preferred stock
          to allow
          the Company to consummate the share exchange transaction with the Gas (BVI)
          Shareholders and the series B convertible preferred stock in connection
          with its
          private financing transactions, although the Company does not have sufficient
          unissued authorized common stock to allow for a complete conversion. Each
          of the
          shares of series A convertible preferred stock was automatically converted
          into
          one share of its common stock upon the effectiveness of its reverse stock-split
          on November 17, 2006. Therefore, as of December 31, 2006, the Company has
          no
          shares of series A convertible preferred stock issued and
          outstanding.
  F-21
 
 **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **10.
          CAPITAL STOCK (Continued)**
 
 *Conversion*
 
 The
          Company issued 14,361,646 of its common shares upon the automatic conversion
          of
          its series A convertible preferred shares after the 304.44-for-1 reverse
          stock-split on November 17, 2006. The Company no longer has any series
          A
          convertible preferred shares outstanding.
 
 Each
          share of the series B convertible preferred stock will become convertible
          into
          common stock, at the option of its holder after the 304.44-for-1 reverse
          stock-split, based on the then applicable conversion rate, which is initially
          one share of series B convertible preferred stock for one share of common
          stock.
 
 
 **11.** **FINANCE
          COSTS, NET**
 
 Details
          of finance costs are summarized as follows:
  2006
                
                2005Total
                    interest cost incurred
                
                $
                9,522
                
                $
                -Interest
                    income
                
                
                (3,268
                )
                
                (3,484
                )Other
                
                
                71,983
                
                
                5,970$
                78,237
                
                $
                2,486
  **12.** **INCOME
          TAX**
 
 In
          accordance with the relevant tax laws and regulations of PRC, the corporation
          income tax rate is 33%. However, in accordance with the relevant taxation
          laws
          in the PRC, the Group is eligible for tax concessions and was exempted
          from part
          of the PRC income taxes for the year.
 
 The
          following table accounts for the differences between the actual tax provision
          and the amounts obtained by applying the applicable PRC corporation income
          tax
          rate of 33% to income before taxes for the years ended December
          31,.
  2006
                
                2005Income
                    before taxation
                
                $
                5,122,453
                
                $
                6,234,348Provision
                    for income taxes at PRC income tax rate
                
                
                1,690,409
                
                
                2,057,335Effect
                    of tax exemption granted to the Group
                
                
                (1,267,125
                )
                
                (1,525,420
                )Income
                    tax
                
                $
                423,284
                
                $
                531,915
  F-22
  **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **13.**  **BUSINESS
          SEGMENT**
 
 The
          Company has contracted with customers usually in two business segments
          altogether, one is for the construction and installation of gas facilities
          and
          another one is the subsequent sales of gas to that customers through the
          gas
          facilities the Company constructs. However, the respective gas facilities
          contracts and gas supply contracts have separately provided for the basis
          of
          revenue recognition and distinctive from each other for the relevant
          cost-and-revenue to be incurred and hence separate calculation and subsequent
          payment of fees for respective business without any interdependence on
          each
          other in this respect.
 
 For
          management purposes, the company is currently organized into two major
          operating
          divisions - gas pipeline construction (installation of gas facilities)
          and sales
          of piped gas. These principal operating activities are the basis on which
          the
          Company reports its primary segment information.
  *2006*
                
                *Gas
                    pipeline*
                
                *Sales
                    of**construction*
                
                *piped
                    gas*
                
                *Others*
                
                *Consolidated*Turnover
                
                $
                7,218,710
                
                
                3,649,870
                
                
                2,138
                
                
                10,870,718Cost
                    of sales
                
                
                (1,549,464
                )
                
                (2,833,077
                )
                
                (6,601
                )
                
                (4,389,142
                )Segment
                    result
                
                $
                5,669,246
                
                
                816,793
                
                
                (4,463
                )
                
                6,481,576
 
 *2005*
                
                *Gas
                    pipeline*
                
                *Sales
                    of**construction*
                
                *piped
                    gas*
                
                *Others*
                
                *Consolidated*Turnover
                
                $
                8,204,988
                
                
                2,702,301
                
                
                -
                
                
                10,907,289Cost
                    of sales
                
                
                (1,607,987
                )
                
                (2,524,404
                )
                
                -
                
                
                (4,132,391
                )Segment
                    result
                
                $
                6,597,001
                
                
                177,897
                
                
                -
                
                
                6,774,898
 
 The
          Company's operations are located in the PRC. All revenue is from customers
          in
          the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas
          and gas pipeline construction are carried out in the PRC. Accordingly,
          no
          analysis of the Company's sales and assets by geographical market is
          presented.
 
 **14.**  **COMMITMENTS
          UNDER OPERATING LEASES**
 
 At
          December 31, 2006, the Group had commitment for future minimum lease payments
          under non-cancelable operating leases in respect of office rented premises
          which
          fall due as follows:
  2006
                
                2005*Land
                    and Buildings*Not
                    later than one year
                
                $
                61,401
                
                $
                59,455Later
                    than one year and not later than five years
                
                
                245,603
                
                
                237,818After
                    five years
                
                
                521,906
                
                
                505,363$
                828,910
                
                $
                802,636
  F-23
 
 **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Stated
          in US Dollars)**
 
 **15.**  **RELATED
          PARTIES TRANSACTIONS**
 
 The
          following material transactions with related parties during the years were
          in
          the opinion of the directors, carried out in the ordinary course of business
          and
          on normal commercial terms:
 
 Sales
          to
          Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd (Zhongran Xiangke),
          an
          investee for which the equity method is used, for the years 2006 and 2005
          were
          $334,326 and $1,088,990 respectively. The amounts receivable from Zhongran
          Xiangke for the years 2006 and 2005 were nil and $177,401 respectively.
          Also,
          included in the other payables are payables to Zhongran Xiangke for the
          years
          2006 and 2005 were $101,592 and $135,792 respectively.
 
 Sales
          to
          Beijing Zhongyou Xiangke Oil Gas Technology Co. Ltd (Zhongyou Xiangke),
          an
          investee of Zhongran Xiangke, for the years 2006 and 2005 were nil and
          $64,205
          respectively. The amounts receivable from Zhongyou Xiangke for the years
          2006
          and 2005 were $2,130 and $13,392 respectively.
 
 
 **16.**  **SUBSEQUENT
          EVENTS**
 
 On
          January 15, 2007, Beijing Gas entered into a stock transfer agreement with
          the
          shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability company
          organized under the laws of the PRC, under which Beijing Gas will acquire
          all
          the capital stock of Beijing Chenguang for a purchase price of RMB 26 million
          (or approximately $3.35 million) in cash. Upon consummation of the transactions
          contemplated by that agreement, Beijing Chenguang will become a wholly-owned
          subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in the
          development, transfer and licensing of technologies used in natural gas
          purification, compression and transportation, as well as the installation
          of
          natural gas equipment and the supply of natural gas.
 
 Under
          the
          Beijing Chenguang agreement, the Company will pay the stock purchase price
          in
          installments. The Company paid the first installment, in the amount of
          10,000,000 RMB, on or about January 22, 2007. The Company will pay the
          second
          installment, also in the amount of RMB ten million, within 20 business
          days of
          completion by the selling shareholders of all government and legal procedures
          required for the sale. The Company will pay the remaining RMB six million
          on or
          prior to April 30, 2007. The agreement requires that all government and
          legal
          procedures required for the sale must be completed by the selling shareholders,
          and the title to the shares must be transferred to Beijing Gas, within
          20
          business days of the selling shareholders’ receiving the first installment of
          the purchase price.
 
 On
          February 28, 2007, the Company disposed of Anping Weiye Gas Co., Ltd in
          the
          amount of RMB 33,000,000.
 F-24
 **Item
        8.**  **Changes
        In and Disagreements With Accountants on Accounting and Financial
        Disclosure**
 
 On
        August
        30, 2006, our Board of Directors approved the dismissal of Robison, Hill
&
Co. (“Robison") as our registered independent certified public accounting firm
        effective on September 7, 2006. Concurrent with this action, our board of
        directors appointed Samuel H. Wong & Co., LLP as our new registered
        independent certified public accounting firm. Samuel H. Wong & Co., LLP is
        located at Room 703, Nan Dao Commercial Building, 359-361 Queen’s Road Central,
        Hong Kong.
 
 Beijing
        Gas’s operating businesses have previously been audited by Samuel H. Wong &
Co., LLP and management elected to continue this existing relationship. There
        have been no disagreements with Robison during the previous two fiscal years
        or
        any subsequent interim period.
  The
        audit
        opinions of Robison, Hill & Co. on the financial statements for the fiscal
        years ended December 31, 2004 and 2005 did not contain an adverse opinion,
        a
        disclaimer of opinion, nor was it qualified or modified as to uncertainty,
        audit
        scope or accounting principles, except that the report of Robison, Hill &
Co. for the fiscal years ended December 31, 2004 and 2005 indicated conditions
        which raised substantial doubt about our ability to continue as a going
        concern.
 
 **Item
        8A.**  **Controls
        and Procedures**
  At
          the
          conclusion of the fiscal year ended December 31, 2006, we carried out an
          evaluation, under the supervision and with the participation of our management,
          including our Chairman and Chief Executive Officer and Chief Accounting
          Officer,
          of the effectiveness of the design and operation of our disclosure controls
          and
          procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
          Act.
          Based on this evaluation, our officers concluded that, as of December 31,
          2006,
          our disclosure controls and procedures were effective and adequately designed
          to
          ensure that the information required to be disclosed by us in the reports
          we
          submit under the Exchange Act is recorded, processed, summarized and reported
          within the time periods specified in the applicable rules and forms and
          that
          such information was accumulated and communicated to our chief executive
          officer
          and chief financial officer, in a manner that allowed for timely decisions
          regarding required disclosure.
  **Item
        8B.**  **Other
        Information**
 
 There
        is
        no information relating to us that was required to be disclosed in a report
        on
        Form 8-K during the fourth quarter of the fiscal year ended December 31,
        2006
        but was not disclosed.
 
 **Part
        III**
 
 **Item
        9.**  **Directors,
        Executive Officers, Promoters, Control Persons and Corporate Governance;
        Compliance with Section 16(a) of the Exchange Act**
 
 In
        connection with the reverse merger transaction, there was a change of control
        of
        our board of directors and management. The following persons were appointed
        our
        executive officers and directors. Except for John D. Kuhns, each of our current
        directors and executive officers is a resident of the PRC. As a result, it
        may
        be difficult for investors to effect service of process within the United
        States
        or British Virgin Islands upon them, or to enforce court judgments obtained
        against them in the United States courts or British Virgin Islands’ courts.
 
 **Directors
        and Executive Officers of the Company**
 
 Directors
                  and Executive Officers
              
              Position/Title
              
              AgeLiu
                  Yu Chuan
              
              
              President
                  & Chief Executive Officer, director and Chairman of the
                  Board
              
              
              43Zhou
                  Zhi Cheng
              
              
              Chief
                  Operating Officer
              
              
              43Zhong
                  Zhi Min
              
              
              Marketing
                  Director
              
              
              52Bian
                  Shu Kui
              
              
              Vice
                  President & Chief Engineer
              
              
              43Chen
                  Fang
              
              
              Chief
                  Financial Officer, director
              
              
              34Chen
                  Guo Wei
              
              
              Director
              
              
              51Sun
                  Quan Dong
              
              
              Director
              
              
              41John
                  D. Kuhns
              
              
              Director
              
              
              56
  There
        are
        no family relationships among our directors or executive officers.
 
 All
        our
        directors hold office until the next annual meeting of our shareholders,
        and
        until their successors have been qualified after being elected or appointed.
        Officers serve at the discretion of our board of directors.
 
 Set
        forth
        below is the biographical information about our directors and executive
        officers:
  35
  *Mr.
        Liu Yu Chuan* Mr.
        Liu was appointed our Chairman, Chief Executive Officer and President on
        September 7, 2006. Mr. Liu graduated from North Industrial University, Beijing,
        PRC with a B.S. degree in electrical engineering. Mr. Liu has been a licensed
        Senior Engineer in the PRC since 1997. Mr. Liu was the Chairman of the board
        of
        directors and General Manager of Beijing Xiang Ke Jia Hua Petroleum and Natural
        Gas Co., Ltd. between 2000 and 2003. Prior to that, Mr. Liu served as CEO
        of
        Lang Fang Zhong Gong Petroleum and Natural Gas Technology Co., Ltd. from
        1997 to
        1999. Prior to that, Mr. Liu served as the Chief of Research and Development
        Department of Petro China from 1983 to 1997.
  *Mr.
        Zhou Zhi Cheng* Mr.
        Zhou Zhi Cheng was appointed our Chief Operating Officer on October 19, 2006.
        Previously, Mr. Zhou served as the director and General Manager of Beijing
        Chenguang Gas Co., Ltd. from late 2002 to 2006. Prior to that, Mr. Zhou served
        as the Associate General Manager and later General Manager of Beijing Zhong
        Ran
        Xiang Ke Petroleunm and Oil Technology Co., Ltd. between 2001 and
        2002.
 
 *Mr.
        Zhong Zhi Min* Mr.
        Zhong
        was appointed our Marketing Director on September 7, 2006. ** Mr.
        Zhong
        graduated from Nanjing University with a B.S. in Philosophy. Mr. Zhong was
        Vice
        President of Shen Zhen Guo Qi Real Estate Co. Ltd from 1995 to 2004. Prior
        to
        that, Mr. Zhong served as a government official in several cities in Jiang
        Xi
        Province between 1978 and 1995.
 
 *Mr.
        Bian Shu Kui* Mr.
        Bian
        was appointed our Vice President and Chief Engineer on September 7, 2006.
        Mr.
        Bian graduated from Daqing Petroleum Institute with a B.S. and Petroleum
        University with a M.S. He served as Vice President of Beijing Zhong Ran Xiang
        Ke
        Petroleum and Oil Technology Co., Ltd. between 2000 and 2006. Prior to that,
        Mr.
        Bian had been with North China Oilfield The First Refinery Factory for fourteen
        years. Mr. Bian was one of the industry experts that drafted The National
        Standard of Natural Gas Usage in Cities in China.
  *Ms.
        Chen Fang* Ms.
        Chen
        was appointed our director and the Chief Financial Officer on September 7,
        2006. ** Ms.
        Chen
        graduated from Sun Yat-Sen University, PRC, with a B.A in law, and from Zhongnan
        University of Economics and Law, PRC, with an MBA. Ms. Chen has been a licensed
        attorney in PRC since 1995. She served as Vice-President and General Manager
        at
        Zhuhai Brightzone Securities Investment and Consulting Ltd. from 2000 to
        2002.
        Prior to that, Ms. Chen served as Manager of Investment Department at Zhuhai
        International Trust and Investment Ltd. from 1994 to 2000. Ms. Chen has a
        wide
        range of experience in the financial industry.
 
 *Mr.
        Chen Guo Wei* Mr.
        Chen was appointed our director on September 7, 2006 and a member of the
        auditor
        committee of our board and a member of the compensation committee of our
        board
        on October 19, 2006. Mr. Chen graduated from East China College of Metallurgy
        with a major in Accounting. From March 2006 to present, Mr. Chen has been
        the
        general manager and chairman of the board of Shen Zhen Jia Xin Real Estate
        Development Co., Ltd. Prior to that, he was the general manager of Hang Zhou
        Steal Group from 2001 to February 2006. Mr. Chen is very experienced in general
        and financial management.
 
 *Mr.
        Sun Quan Dong* Mr. Sun
        was appointed our director on September 7, 2006 and a member of the auditor
        committee of our board and a member of the compensation committee of our
        board
        on October 19, 2006. Mr. Sun graduated from Shanghai Maritime University
        with a
        B.S. Mr. Sun has been Chairman of Jidong Shipping Co., Ltd from 1995. Prior
        to
        that, Mr. Sun served as Manager in the Shipping Department of Shekou Shipping
        Co., Ltd between 1987 to 1994.
 
 *John
        D. Kuhns* Mr. John
        D. Kuhns was appointed a director of our company on September 7, 2006 and
        a
        member of the auditor committee of our board and a member of the compensation
        committee of our board on October 19, 2006. Mr. Kuhns has been a 95%
        shareholder, a director and chairman of Kuhns Brothers, Inc., a holding company
        founded in 1987 for its subsidiary, Kuhns Bros. & Co., Inc., an investment
        banking firm specializing in providing financing for power technology ventures,
        and, more recently, manufacturing operations within the PRC. Additionally,
        Kuhns
        Brothers, Inc. owns 100% of Kuhns Brothers Securities Corporation, a broker
        dealer, registered with the SEC, in which Mr. Kuhns is the Chairman. Since
        March
        2005, Mr. Kuhns has been a director and chairman of Deli Solar (USA), Inc.,
        a
        U.S. reporting company with solar hot water heaters manufacturing operation
        in
        the PRC. Since, December, 2005, Mr. Kuhns has served as a Director of Fushi
        International, Inc. Since 2002, Mr. Kuhns has been a director and chairman
        of
        Distributed Power, Inc., a public company that owns electric generating
        projects. Mr. Kuhns is also a director of China Sciences Conservational Power
        Limited, a company listed on the Hong Kong Stock Exchange. Neither of the
        foregoing Kuhns companies, nor Deli Solar (USA), Inc., Distributed Power,
        Inc.,
        Fushi International, Inc. or China Sciences Conservational Power Limited
        are
        affiliated with us. Mr. Kuhns holds a bachelors degree in sociology and fine
        arts from Georgetown University, a master's degree in fine arts from the
        University of Chicago and an MBA degree from the Harvard Business
        School.
  36
  To
        our
        knowledge, during the last five years, none of our directors and executive
        officers (including those of our subsidiaries) has:
 
 ·
              Had
                  a bankruptcy petition filed by or against any business of which
                  such
                  person was a general partner or executive officer either at the
                  time of
                  the bankruptcy or within two years prior to that
                  time.
 
 ·
              Been
                  convicted in a criminal proceeding or been subject to a pending
                  criminal
                  proceeding, excluding traffic violations and other minor
                  offenses.
 
 ·
              Been
                  subject to any order, judgment or decree, not subsequently reversed,
                  suspended or vacated, of any court of competent jurisdiction, permanently
                  or temporarily enjoining, barring, suspending or otherwise limiting
                  his
                  involvement in any type of business, securities or banking
                  activities.
 
 ·
              Been
                  found by a court of competent jurisdiction (in a civil action),
                  the SEC,
                  or the Commodities Futures Trading Commission to have violated
                  a federal
                  or state securities or commodities law, and the judgment has not
                  been
                  reversed, suspended or vacated.
 
 Audit
        Committee Financial Expert
 
 Our
        board
        of directors appointed an audit committee on October 19, 2006. Because we
        only
        recently consummated the reverse merger transaction and appointed the current
        members of our board of directors, our board of directors has not yet appointed
        a member who qualifies as an "audit committee financial expert" as defined
        in
        Item 401(e) of Regulation S-B, and is "independent" as the term is used in
        Item
        7(d)(3)(iv) of Schedule 14A under the Exchange Act.
 
 Audit
        Committee
 
 Our
        board
        of directors appointed an audit committee on October 19, 2006. Our audit
        committee members are Sun Quan Dong, Chen Guo Wei and John D. Kuhns. At the
        present time, we believe that the members of our audit committee are
        collectively capable of analyzing and evaluating our financial statements
        and
        understanding internal controls and procedures for financial reporting. Our
        company, however, recognizes the importance of good corporate governance
        and
        intends to identify and appoint an audit committee comprised entirely of
        independent directors, including at least one financial expert, in the near
        future.
 
 37
 **Item
        10.**  **Executive
        Compensation**
 
 The
        following is a summary of the compensation paid by Beijing Gas to its named
        executive officers and directors for the three years ended December 31, 2005,
        2004 and 2003, respectively.
 
 **Summary
        Compensation Table**
 
 Name
                    and Principal Position
                
                Year
                
                Salary
                  ($)
                
                Bonus
                  ($)
                
                Stock
                  Awards
                  ($)
                
                Option
                    Awards
                  ($)
                
                Non-equity
                    Incentive Plan Compensation
                  ($)
                
                Change
                    in Pension Value and Nonqualified Deferred Compensation
                    Earnings
                  ($)
                
                All
                    Other Compensation
                  ($)
                
                Total
                  ($)Liu
                    Yu-Chuan,
                  CEO
                
                2006
                  2005
                  2004
                
                $
                100,000
                  22,800
                  19,000
                
                $
                60,000
                  1,913
                  750
                
                
                -
                  -
                  -
                
                
                -
                  -
                  -
                
                
                -
                  -
                  -
                
                
                -
                  -
                  -
                
                
                -
                  -
                  -
                
                $
                  $
                60,000
                  24,713
                  19,750
                  -
  Each
        Director who does not serve as an executive receives a cash allowance in
        the
        amount of $10,000 annually, beginning in 2006.
  **Compensation
          Discussion and Analysis**
  Overview
          of Compensation Program and Philosophy
  The
          Company has three executive officers, Mr. Liu Yu Chuan, Mr. Zhou Zhi Cheng,
          and
          Ms. Chen Fang. Mr. Liu and Ms. Chen are also directors of the Company.  The
          Board of Directors also serves as the Company’s compensation
          committee.
 
 The
          Board
          of Directors’ goal in determining compensation levels is to adequately reward
          the efforts and achievements of executive officers for the management of
          the
          Company.  The Company has no pension plan or non-equity incentive plan or
          deferred compensation arrangement.  The Company has a limited equity option
          plan under which it will issue options to purchase 200,000 shares of the
          Company’s common stock to each of Mr. Zhou and Ms. Chen at an exercise price of
          $3.00 per share. The options will vest as follows: 45% will vest in early
          2008;
          30% will vest in early 2009; and 25% will vest in early 2010. The Company
          has
          not used a compensation consultant in any capacity but believes that its
          executive officer compensation package is comparable to similar businesses
          in
          its location of operations.
  Each
          of
          our executive officers has an employment agreement with the Company that
          outlines salary and benefit arrangements.  The three agreements have
          similar terms, which include, but are not limited to: base salaries of
          cash, the
          provision of labor-related insurance, termination for cause, termination
          on 30
          days’ notice and termination without notice and the provision of labor-related
          benefits in conformance with PRC labor laws. The agreements are for a term
          of
          three years. Officers serve at the discretion of our board of directors.
  Compensation
          of Directors
  Persons
          who are directors and employees are not currently additionally compensated
          for
          their services as a director.  Persons who are directors who are not
          employees receive a cash allowance of $10,000 per year. All our directors
          hold
          office until the next annual meeting of our shareholders, and until their
          successors have been qualified after being elected or appointed.
 **Item
        11.**  **Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters**
 
 The
        following table sets forth, as of March 12, 2007, certain information with
        respect to the beneficial ownership of our equity securities, by (i) any
        person
        or group with more than 5% of any class of our voting securities, (ii) each
        director, (iii) our chief executive officer and each other executive officer
        whose cash compensation for the most recent fiscal year exceeded $100,000
        and
        (iv) all executive officers and directors as a group. The table reflects
        the
        ownership of our equity securities by the foregoing parties after the
        304.44-for-1 reverse stock-split of our common stock.
 
 As
        of the
        date of this annual report, we had outstanding (i) 14,920,346 shares of common
        stock, (ii) no shares of series A convertible preferred stock,
        (iii) 3,795,571 shares of series B convertible preferred stock, (iv) series
        A warrants to purchase an aggregate of 3,854,599 shares of common stock at
        $3.84
        per share, (v) series B warrants to purchase an aggregate of 1,693,723 shares
        of
        common stock at $5.48 per share, (vi) series J warrants to purchase an aggregate
        of 3,083,588 shares of common Stock at $3.01 per share, (vii) series C warrants
        to purchase an aggregate of 3,083,588 shares of common stock at $4.22 per
        share,
        and (viii) series D warrants to purchase an aggregate of 1,541,794 shares
        of
        common stock at $6.03 per share.
  The
        series A and B warrants have a term of five years. Each series J warrant
        is
        exercisable for a period of twelve months following its issuance. Each series
        C
        or D warrant is only exercisable once the series J warrant of such holder
        is
        exercised and for such number of shares of common stock that have been exercised
        by such holder pursuant to the series J warrant of such holder. The terms
        of
        series C and D warrants are for five years following the date of issuance
        of
        such series C or D warrants, as applicable.
 
 Shares
        of
        Series A and Series B convertible preferred stock vote together with shares
        of
        common stock on all matters upon which stockholders are entitled to vote,
        except
        to the extent a class vote is required under Utah law or as otherwise provided
        in the certificate of designations creating such series. On those matters
        upon
        which the series A convertible preferred stock votes together with the common
        stock and the series B convertible preferred stock as a single class, each
        share
        of series A convertible preferred stock carries a number of votes equal to
        the
        number of shares of common stock issuable in a mandatory conversion based
        on the
        then applicable conversion rate. On those matters upon which the series B
        convertible preferred stock votes together with the common stock and series
        A
        convertible preferred stock as a single class, each share of series A
        convertible preferred stock carries a number of votes equal to the number
        of
        shares of common stock that would be issuable upon conversion. Each holder
        of
        series A convertible preferred stock or series B convertible preferred stock
        shall be entitled to notice of any stockholders’ meeting in accordance with our
        bylaws.
  38
 In
        determining beneficial ownership of the common stock after the 304.44-for-1
        reverse stock-split, the number of shares shown includes shares which the
        beneficial owner may acquire upon exercise of warrants or options which may
        be
        acquired within 60 days. In determining the percent of common stock owned
        by a
        person on March 12, 2007, (a) the numerator is the number of shares of the
        class
        beneficially owned by such person, including shares which the beneficial
        ownership may acquire within 60 days upon conversion of the series A convertible
        preferred stock or series B convertible preferred stock or exercise of the
        warrants and option, and (b) the denominator is the sum of (i) the total
        shares
        of that class outstanding on March 12, 2007, and (ii) the total number of
        shares
        that the beneficial owner has acquired or may acquire upon conversion
        of the series B convertible preferred stock or exercise of the warrants and
        option. Unless otherwise stated, each beneficial owner has sole power to
        vote
        and dispose of the shares.
 
 Except
        as
        otherwise stated, the address of the directors and executive officers listed
        in
        the table is:
 
 c/o
                  Beijing Zhong Ran Wei Ye Gas Co., Ltd.N0.18
                  Zhong Guan Cun Dong St.Haidian
                  DistrictBeijing,
                  China 10083
 Amount
                    and Nature of Beneficial
                  Ownership
                  (After
                    Reverse Split)
                
                
                
                Percent
                    of Class
                  (After
                    Reverse Split)Shareholder
                
                Series
                  B
                    Preferred
                  Stock(1)
                
                Common
                  Stock(2)
                
                
                
                Series
                  B
                    Preferred Stock
                
                Common
                    Stock**Owner
                    of More than 5% of Class**GAS
                    (BVI)
                
                
                
                
                
                238,371
                
                
                
                
                
                
                
                
                1.62
                %Eloten
                    Group Ltd.
                
                
                
                
                
                6,632,460
                
                
                
                
                
                
                
                
                44.40
                %Leading
                    King Investment Limited
                
                
                
                
                
                5,474,300
                
                
                
                
                
                
                
                
                36.65
                %Vision
                    Opportunity Master Fund, Ltd.
                
                
                3,205,829
                
                
                14,229,910
                
                
                
                
                
                79.68
                %
                
                49.20
                %**Directors
                    and Executive Officers**Liu
                    Yu Chuan
                
                
                
                
                
                6,632,460
                
                
                (5)(6
                )
                
                
                
                
                45.14
                %Sun
                    Quan Dong
                
                
                
                
                
                5,474,300
                
                
                (7)(8
                )
                
                
                
                
                37.26
                %Zhong
                    Zhi Min
                
                
                
                
                
                400,113
                
                
                (3
                )
                
                
                
                
                2.72
                %Zhou
                    Zhi Cheng
                
                
                
                
                
                -Bian
                    Shu Kui
                
                
                
                
                
                176,850
                
                
                (3
                )
                
                
                
                
                1.20
                %Chen
                    Fang
                
                
                
                
                
                66,693
                
                
                (3
                )
                
                
                
                
                0.45
                %Chen
                    Wei Guo
                
                
                
                
                
                -
                
                
                (3
                )
                
                
                
                
                -John
                    Kuhns
                
                
                
                
                
                808,697
                
                
                (4
                )
                
                4.24
                %
                
                4.16
                %**All
                    Directors and Executive Officers**
                
                
                
                
                
                13,559,114
                
                
                
                
                
                4.24
                %
                
                87.33
                %
  39
  (1)
        The
        Series B convertible preferred stock and the warrants are assumed to be
        non-convertible and non-exercisable within 60 days of their date of
        issuance.
 
 (2)
        Includes the shares of common stock issuable upon conversion of series B
        convertible preferred stock and shares of common stock issuable upon exercise
        of
        the warrants.
 
 (3)
        Shares of common stock issued to Gas (BVI) as a result of the consummation
        of
        the share exchange agreement are beneficially attributed to each of the Gas
        (BVI) shareholders based on each shareholder's percentage ownership interest
        in
        Gas (BVI) immediately prior to execution of the share exchange
        agreement.
  (4)
        Includes common shares issued upon the conversion, on February 23, 2007,
        of (i)
        113,847 shares of series B convertible preferred stock issued to Kuhns Brothers,
        Inc., which are beneficially attributed to John Kuhns, and (ii) 56,925 shares
        of
        series B convertible preferred stock issued to John Kuhns.
 
 (5)
        Includes 6,524,174 common shares issued upon conversion of series A convertible
        preferred stock to Eloten Group Ltd., which are beneficially attributed to
        Mr.
        Liu Yu Chuan. Mr. Liu and his wife hold an aggregate of 100% ownership interest
        in Eloten Group Ltd.
 
 (6)
        Includes 108,286 shares of common stock beneficially attributed to Eloten
        Group
        Ltd. based on Eloten Group Ltd.'s ownership interest in Gas (BVI).
 
 (7)
        Includes 5,384,923 common shares issued upon conversion of series A convertible
        preferred stock to Leading King Investment Limited, which are beneficially
        attributed to Mr. Sun Quan Dong. Mr. Sun holds 50% ownership interest in
        Leading
        King Investment Limited.
 
 (8)
        Includes 89,377 shares of common stock beneficially attributed to Leading
        King
        Investment Limited based on Leading King Investment Limited's ownership interest
        in Gas (BVI). Mr. Sun holds a 50% ownership interest in Leading King Investment
        Limited.
 
 
 **Item
        12.**  **Certain
        Relationships and Related Transactions, and Director
        Independence**
 
 **Share
        Exchange Agreement and the Issuance and Conversion of Series A
        Stock**
 
 On
        September 7, 2006, we entered into and consummated a share exchange agreement
        with the holders of all of the outstanding capital stock of Gas (BVI), which
        were: Eloten Group Ltd., Leading King Investment Limited, Zhong Zhi Min,
        Li Shu
        Wang, Chen Si, Xiang Shun Ying, Chong Shun, Liu Xiao Bing, Zhuo Qing Hui,
        Bian
        Shu Kui, Chen Fang, Shang Jian Zhong and Wang Wei Dong, or, collectively,
        the
        Gas (BVI) shareholders.
 
 Pursuant
        to the terms of the share exchange agreement, we issued an aggregate of
        14,361,646 shares of our series A convertible preferred stock in exchange
        for
        the 9,950,000 shares of common stock of Gas (BVI) held by the Gas (BVI)
        shareholders, which constituted all of Gas (BVI)’s capital stock. Each share of
        series A convertible preferred stock was converted automatically into one
        share
        of our common stock, par value $0.001 per share, upon the completion of the
        304.44-for-1 reverse stock-split of our common stock more as fully described
        in
“Reverse Stock-Split” in the section titled “Annual report Summary” of this
        annual report. Therefore, the shares of series A convertible preferred stock
        issued to the Gas (BVI) Shareholders were automatically converted into an
        aggregate of 14,361,646 shares of our common stock.
 
 As
        a
        result of the consummation of the share exchange transaction, we ceased being
        a
        shell company as such term is defined in Rule 12b-2 under the Exchange Act.
        Gas
        (BVI) is now our wholly-owned subsidiary, and Beijing Gas is now our indirectly
        wholly-owned subsidiary in the PRC.
 
 40
 The
        foregoing description of the share exchange agreement is qualified in its
        entirety by the text of the agreement, which is annexed hereto as Exhibit
        10.1.
 
 **Private
        Placement Offering of Series B Stock and Warrants**
  On
        September 7, 2006, we entered into and closed a stock purchase transaction
        with
        Vision Opportunity Master Fund, Ltd., SEI Private Trust Co. FAO - The JM
        Smucker
        Co. Master Fund, and Coronado Capital Partners LP, pursuant to which we issued,
        for an aggregate of $6,876,800 in gross cash proceeds, to the investors,
        an
        aggregate of 2,509,782 shares of our series B convertible preferred stock,
        and
        series A, B, J, C and D warrants to purchase shares of our common stock as
        described below, and to Kuhns Brothers, Inc. and its designees, an aggregate
        of
        635,822 shares of our series B convertible preferred stock, and warrants
        to
        purchase shares of our common stock as described below.
  On
        October 20, 2006, we entered into and closed a stock purchase transaction
        with
        Vision Opportunity Master Fund, Ltd., Nite Capital LP and Ijaz Malik, pursuant
        to which we issued to the investors, for an aggregate of $2,404,800 in gross
        cash proceeds, an aggregate of 877,664 shares of our series B convertible
        preferred stock, at $2.74 per share, and series A, B, J, C and D warrants
        as
        described below.
 
 The
        series A warrants allow their holders to purchase an aggregate of 3,854,599
        shares of our common stock at $3.84 per share. The series B warrants allow
        their
        holders to purchase an aggregate of 1,693,723 shares of our common stock
        at
        $5.48 per share. The series J warrants allow their holders to purchase an
        aggregate of 3,083,588 shares of our common stock at $3.01 per share. The
        series
        C warrants allow their holders to purchase an aggregate of 3,083,588 shares
        of
        our common stock at $4.22 per share. The series D warrants allow their holders
        to purchase an aggregate of 1,541,794 shares of our common stock at $6.03
        per
        share.
 
 The
        series A and B warrants are exercisable for a term of five years. Each series
        J
        warrant is exercisable for a period of twelve (12) months following its
        issuance. Each series C or D warrant is only exercisable once the holder
        has
        exercised his or its series J warrant, and for the same number of shares
        of
        common stock that the holder’s series J warrant was exercised for. The terms of
        the series C and D warrants are for five years following the date of issuance
        of
        such series C or D warrants, as applicable. *Please
        refer to “Recent Developments” in the section titled “Organization and Business
        of the Company” of this annual report for additional information regarding the
        private offerings of series B convertible preferred stock and the
        warrants.*
  The
        foregoing description of the stock purchase agreements is qualified in its
        entirety by the text of the agreement and amendments thereto, which are annexed
        hereto as Exhibits 4.1, 4.4, 4.5 and 4.6.
 
 **Registration
        Rights Agreements**
 
 In
        connection with the stock purchase agreements, we entered into registration
        rights agreements with the investors of the series B convertible preferred
        stock
        on September 7, 2006 (as amended on October 3, 2006) and October 20, 2006,
        respectively. Pursuant to these registration rights agreements, we are required
        to file with the SEC a "resale" registration statement on Form SB-2, providing
        for the resale of all share of our common stock issuable upon conversion
        of the
        series B convertible preferred stock and shares of our common stock issuable
        upon exercise of our warrants, and 1,314,405 shares of common stock issued
        upon
        conversion of series A convertible preferred stock issued to certain
        shareholders of Gas (BVI) pursuant to the share exchange transaction.
 
 The
        foregoing description of the registration rights agreements is qualified
        in its
        entirety by the text of the agreements, which are annexed hereto as Exhibits
        4.2
        and 4.7.
  41
 Please
        refer to “Recent Developments” under the section titled “Organization and
        Business of the Company” of this annual report for additional information
        regarding the registration rights agreement.
 
 **Lock-Up
        Agreement**
 
 Simultaneously
        and in connection with our entry into the stock purchase agreement on September
        7, 2006, we entered into a Lock-Up Agreement with the Gas (BVI) Shareholders,
        pursuant to which the Gas (BVI) Shareholders agreed to not transfer any of
        the
        shares of our common stock issuable upon conversion of the series A convertible
        preferred stock issued in the share exchange transaction described above
        during
        the period commencing on the closing date of the stock purchase agreement
        and
        expiring on the date that is the later of one year following the closing
        date of
        the stock purchase agreement or six months following the effective date of
        the
        registration statement filed by us with the SEC providing for the resale
        of the
        shares of common stock issuable upon conversion of the series A convertible
        preferred stock and exercise of any warrants; provided, however, that no
        Gas
        (BVI) Shareholder shall, during the twelve months following such period,
        sell
        more than one-twelfth of their total holdings of our common stock or series
        A
        convertible preferred stock during any one month.
 
 The
        foregoing description of the Lock-Up Agreement is qualified in its entirety
        by
        the text of the agreement, which is annexed hereto as Exhibit 4.3.
  **Placement
        Agent Compensation**
  In
        connection with the private financing transactions, Kuhns Brothers, Inc.,
        received the following compensation: (i) $80,000 cash as signing fee,
        documentation fee and purchase fee, (ii) $120,000 cash as purchase fees in
        connection with the purchase by Gas (BVI) of the common stock of Dolce Ventures,
        Inc. from certain shareholders of Dolce pursuant to a stock purchase agreement
        dated as of August 24, 2006, (iii) 10% of the total cash paid for the series
        B
        convertible preferred stock and warrants, and (iv) a warrant to purchase
        an
        aggregate of 467,153 shares of our common stock at $3.84 per share. In addition,
        Kuhns Brothers, Inc. is to receive 10% of the proceeds of any exercise of
        the
        warrants sold to investors of the series B convertible preferred stock. Upon
        the
        closing of the private financing transactions, a non-refundable monthly retainer
        of $10,000 per month will be paid to Kuhns Brothers for 24 months. Dolce
        Ventures, Inc. was the name of our company at an earlier stage of its
        development. See “Organizational History of Sino Gas” in the section of this
        annual report titled “Description of Business.”
  **Consulting
        Agreement**
 
 Pursuant
        to a Consulting Agreement dated as of August 8, 2006 that we entered into
        with
        Kuhns Brothers, Inc., Kuhns Brothers is entitled to receive an aggregate
        of
        635,822 shares of Series B Stock. Kuhns Brothers designated the following
        persons to receive a portion of these series B convertible preferred shares:
 **Name**
                
                **Shares**“James”
                    Tie Li
                
                
                27,373Sam
                    Shoen
                
                
                25,875Paul
                    Kuhns
                
                
                5,175Kuhns
                    Brothers, Inc.
                
                
                113,847John
                    Kuhns
                
                
                56,925Mary
                    Fellows
                
                
                56,925Vision
                    Opportunity Master Fund, Ltd.
                
                
                286,120Belmont
                    Partners, LLC
                
                
                31,791Guzov
                    Ofsink, LLC
                
                
                31,791
 42
 
 **Beijing
        Chenguang Agreement**
 
 One
        of
        the selling shareholders under the Beijing Chenguang agreement described
        elsewhere in this annual report, Mr. Zhou Zhi Cheng, has been our Chief
        Operating Officer since October 19, 2006. Mr. Zhou owned 30% of the Beijing
        Chenguang stock immediately prior to the signing of the Beijing Chenguang
        Agreement. Mr. Zhou is also a shareholder and legal representative of another
        selling shareholder, Beijing Chenguang Weizhong Management Technology Consulting
        Ltd., Co., which owned 10% of the Beijing Chenguang stock immediately prior
        to
        the signing of the agreement.
 **Information
          relating to compliance with Section 16(a) of the Exchange
          Act**
 None.
 **ITEM
        13.**  **EXHIBITS**
  Exhibit
                        No.
                    Description
                        of Exhibit3.1
                    Articles
                        of Incorporation, as amended and corrected.Unanimous
                        Written Consent of Directors authorizing reverse stock split
                        and name
                        change.3.2
                    Bylaws.3.3
                    Specimen
                        of Common Stock certificate.3.4
                    Certificate
                        of Designations authorizing the Series A Convertible Preferred
                        Stock.3.5
                    Certificate
                        of Designations authorizing the Series B Convertible Preferred
                        Stock.3.6
                    Amended
                        and Restated Certificate of Designations authorizing the
                        Series B
                        Convertible Preferred Stock.
 43
  Exhibit
                    No.
                  Description
                      of Exhibit4.1
                  Form
                      of Series B Stock Purchase Agreement, dated as of September 7,
                      2006,
                      by and among, Dolce Ventures, Inc., Vision Opportunity Master
                      Fund, Ltd.
                      and each of the other investors party thereto.4.2
                  Form
                      of Registration Rights Agreement, dated as of September 7, 2006,
                      by
                      and between, Dolce Ventures, Inc., Vision Opportunity Master
                      Fund,
                      Ltd.4.3
                  Form
                      of Lock-Up Agreement, dated as of September 7, 2006, by and among,
                      Dolce Ventures, Inc., Leading King Investment Limited, Eloten
                      Group, Ltd.,
                      Cheng Fang and certain other parties named therein.4.4
                  Form
                      of Series A Warrant4.5
                  Form
                      of Series B Warrant4.6
                  Form
                      of Series C Warrant4.7
                  Form
                      of Series D Warrant4.8
                  Form
                      of Series J Warrant4.9
                  Form
                      of Warrant issued to Kuhns Brothers10.1
                  Form
                      of Share Exchange Agreement dated as of September 7, 2006,
                      by and between,
                      Dolce Ventures, Inc., Yu-chuan Liu, and each of the other parties
                      named
                      therein.10.2
                  Form
                      of Stock Purchase Agreement dated as of August 24, 2006, by
                      and between,
                      Gas Investment China Co., Ltd. and each of the other parties
                      named
                      therein.10.3
                  Form
                      of Consulting Agreement dated August 8, 2006, by and between Kuhns
                      Brothers, Inc. and Dolce Ventures, Inc.10.4
                  Form
                      of Engagement Letter dated May 22, 2006, by and between, Beijing
                      Zhong Ran
                      Wei Ye Gas Co., Ltd. and Kuhns Brothers, Inc.10.5
                  Form
                      of Escrow Agreement dated September 7, 2006, by and between,
                      Gas
                      Investment China Co., Ltd., Vision Opportunity Master Fund,
                      Ltd. and
                      Kramer Levin Naftalis & Frankel LLP.16.1
                  Letter
                      dated September 7, 2006 from Dolce Ventures, Inc. to Robison,
                      Hill &
                      Co.16.2
                  Letter
                      dated September 12, 2006 from Robison, Hill & Co. to the
                      SEC.21.1
                  List
                      of Subsidiaries
  **Item
        14.**  **Principal
        Accountant Fees and Services**


Aggregate
          fees billed by the Company's current principal accountants, Samuel H.
          Wong & Co., LLP, for audit services related to the most recent fiscal
          year, and for other professional services billed in the most recent fiscal
          year, were as follows:
 FISCAL
                      2006Audit
                      Fees (1)
                  $100,000Audit-Related
                      Fees
                  --Tax
                      Fees (2)
                  --All
                      Other Fees
                  --Total
                  $100,000
 (1)
                  Comprised
                      of the audit of the Company's  annual  financial 
                      statements  and  reviews of the Company's quarterly 
                      financial  statements,  as well as consents related to and
                      reviews of other documents filed with the Securities and Exchange
                      Commission.
  (2)
                Comprised 
                    of  preparation  of all federal and
                    state corporate income tax returns for the Company and its
                    subsidiaries.
  Under
          the
          Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
          by the
          Company's independent  accountants must now be approved in advance by the
          Audit  Committee  to assure that such  services  do not
          impair the  accountants' independence  from the Company.  The
          Company  does not have an Audit  Committee; therefore,  the Board
          of Directors  reviews and approves  audit and  permissible
          non-audit  services  performed by Samuel H. Wong & Co.,
          L.L.P., as well as the fees charged by them for such services.
 44